The following information relates to Questions 1-4.

Mick Taylor is portfolio manager of a well-diversified, large-cap U.S. equity fund. Recently, Taylor and his team have been overweight cash, luckily avoiding a large drawdown in the S&P 500. After a near 30% decline in the headline index, Taylor is feeling more optimistic about U.S. equity prices. However, Taylor notices that implied volatility, derived from the S&P 500 options chain, remains at abnormally high levels. Hence, Taylor decides to express his bullish views via index options, rather than risking the funds full cash amount by investing in individual stocks. Taylor also believes the elevated levels of volatility are likely to decline during the next few months.

Details on the S&P 500 3-month option chain are shown below. The S&P 500 Index is currently trading at 2785. The index multiplier is 100.

Calls

Strike	$Bid	$Ask	Implied Vol	Delta	Open Intertest
2575	308.4	312.7	.4127	.6955	8,183
2650	253.8	285.2	.3931	.6411	10,264
2785	164.9	167.9	.3510	.5259	2,857
2900	101.6	103.9	.3164	.4073	47,984
3000	58.5	60.7	.2874	.2948	51,659

Puts

Strike	$Bid	$Ask	Implied Vol	Delta	Open Intertest
2575	104.9	106.9	.4048	-.3019	13,023
2650	125.2	127.3	.3840	-.3564	32,573
2785	170.2	172.8	.3439	-.4745	2,099
2900	221.0	224.6	.3087	-.5959	47,741
3000	277.6	281.6	.2785	-.712	48,256

1. Taylor decides to execute a bull spread using puts. Taylor is most likely to

1. Buy the 2900 strike put and sell the 2650 strike put

2. Buy the 2650 strike put and sell the 2900 strike put

3. Buy the 2900 strike put and sell 3000 strike put

2. To take advantage of his view that implied volatility is likely to fall during the next several months, Taylor is most likely to

1. Sell the 2785 call and buy the 2785 put

2. Sell the 2785 call and sell the 2785 put

3. Buy the 2785 call and buy the 2785 put

3. If Taylor bought the 2650 call and sold 2900 call, Taylor would have

1. Unlimited upside potential and limited downside

2. Limited upside potential and unlimited downside potential

3. Limited upside potential and limited downside potential

4. If Taylor sold the 2785 strike straddle, and at expiration, the S&P 500 closed at 2700, the profit and loss per option contact is closest to

1. $8,500 Gain

2. $8,500 Loss

3. $27,010 Gain