I haven't tried the 2nd option but I use the 1st option all the time.
The pro of option 1 is no extra hardware/network ports needed.
The con of option 1 is that your host computer (in my case OSX) needs to understand TCP/IP over usb.
In the case of OSX I use the HorNDIS drivers (HoRNDIS: USB tethering driver for Mac OS X | Joshua Wise's domain). Which just adds another network connection in your system prefs.