I'd aim for option 2

Although the areas look small it looks pretty grim because that is delaminated rust => i.e. rot

I'd expect to see some alarmingly large holes after you've removed the rust.

Attack it with an angle grinder with a wire brush - be rough - try to break the area

As you suggest in one of your options this is a critical component - a shock absorber letting go at an inconvenient moment could be catastrophic

__________________
1992 W201 190E 1.8 171,000 km - Daily driver
1981 W123 300D ~ 100,000 miles / 160,000 km - project car stripped to the bone
1965 Land Rover Series 2a Station Wagon CIS recovery therapy!
1961 Volvo PV544 Bare metal rat rod-ish thing

I'm here to chat about cars and to help others - I'm not here "to always be right" like an internet warrior



Don't leave that there - I'll take it to bits!