The particles of the medium (slinky in this case) move up and down (choice #2) in a transverse wave scenario.
This is the defining characteristic of transverse waves, like particles on the surface of water while a wave travels on it, or like particles in a slack rope when someone sends a wave through by giving it a jolt.
The other kind of waves is longitudinal, where the particles of the medium move "left-and-right" along the direction of the wave propagation. In the case of the slinky, this would be achieved by giving a tensioned slinky an "inward" jolt. You would see that such a jolt would give rise to a longitudinal wave traveling along the length of the tensioned slinky. Another example of longitudinal waves are sound waves.