This happened to me asking for a promotion. When the option thing came up I simply phoned a compeditor and asked them to send me a job offer. Next day I had what I wanted.
I think PHB would choose Option 3. Replacing experienced, qualified, loyal employees with lower paid, inexperienced, most likely to call in sick due to a hangover, younger person seems to be the norm with managers these days. And companies wonder why overseas companies are out competing them?
He should have mentioned that option 3 would have him replaced by someone who while having the required skills would lack the experience necessary to know how to use the people assigned to his project in the most efficient manner since he has no knowledge of their particular talents and failings and would not know how to properly deal with problems or for that matter properly identify whether it is a problem or merely a symptom of a greater problem.