Mark, great choice on the truck. I'm a big fan of the little Cummins' engines. The 5.9 6BT only weighs about 300 lbs more than the original engine in your proposed truck. It'd have plenty of power and torque to spare. In the real world it'd be a bit of a challenge to actually do the conversion, although it's been done by members on this board and they may jump in with first hand experiences on the conversion.
Definitely go with Option 1 and the stock frame for a real working truck.
Consider a GMC 302 for the powerplant, it'd be a good option in the real world and again fit the old truck like a glove.
Here's a conversation about 302s.
Good Luck,
RonR