Option 1 works very well for me, except when I've been playing for a while and enter one of the well populated cities (SW, IF). All 5 copies then start loading tons of textures from disk, and I experience lag as a result. Sometimes I'll see walls, ground, etc as just a flat white surface while the textures are loading. I assume that if I had each copy on multiple drives this problem would go away, but I only have one drive in my machine.

When I'm away from the cities, I never have any problems with lag at all. Once the textures have loaded in cities, the lag disappears there as well.