I'll say a hybrid of 1 and 2. Right now, you're better served in the long run by spending on the arena, not on players to push you over the top. If you can promote with what you have, of course, go for it, but don't spend extra to do so yet.
And I'll say that if you do promote, you may well find yourself more competitive in a III than you think. I went through a very similar start as you did, and I didn't expect to be competitive at IV or III and it's turned out fine so far. The age of your players is somewhat of a concern, but only one of them is 33, so at least the others aren't losing skill yet, just value.