IMO, you should pursue option 1 if you end goal is to consolidate your virtual infrastructure where in all the hosts would be managed by the same vCenter i.e. 5.1. However note that this process would be disruptive because its mandatory the hosts should be using vSphere 5.1. In addition to this I think that this option is only available in vSphere Web Client as of now, last time I checked few weeks back this option was not available in vSphere client.
If you want to keep it simple then use VMware Converter to migrate all the VMs from 4.x to 5.x
Hope this helps.