Ok, if we go with option 1 then the thumbnail images don’t show as per your demo, so we need to select featured image. Then when we do, we get 2 instances of the image. If we then delete the image from the post, then when you go into the full blog post there is no image.
Sorry, I don’t understand what you mean with Option 2. I’m not sure how this will impact on the thumbnails etc.
Also we cant get the thumbnails to be rectangular for some reason, even when specifying rectangular sizes, they always show as square!