it’s impossible to say what intent the wording of those prompts is trying to capture, but the effect of selecting your “Option #2” is that your ID will become a “branch disagreement”, meaning that your ID will disagree with any previous or subsequent IDs that are subordinate to the taxon you selected.
there’s more information about branch disagreements here: https://forum.inaturalist.org/t/change-wording-used-by-the-system-when-downgrading-an-observation-to-an-higher-level-taxa/3862/60.