Black Market and game setup
It is the first option; all setup things are done at the start of a game. A card being in the Black Market deck acts just like a card in the Supply for this purpose. 

Strangely enough, this rule is not listed in the official Black Market FAQ. But it is listed in several other places.


From the Cornucopia rulebook:



  If you are using the promotional card Black Market, and Young Witch is in the Black Market deck, put out a Bane pile for Young Witch.



From the Baker FAQ in the Guilds rulebook:



  In games using this card, each player starts the game with a Coin token. This includes games using the promo card Black Market in which Baker is in the Black Market deck.



From the Alchemy rulebook:



  Also add the Potion pile if you are using the promotional card Black Market, and the Black Market deck includes at least one card with [P] in the cost. If you do not have any cards with [P] in the cost in the Supply or in the Black Market deck, do not use the Potion pile in this game. 



From the Trade Route FAQ in the Prosperity rulebook:



  If you are using Black Market and Trade Route is in the
  Black Market deck, put tokens on Victory card piles at the start of the game.


Although the Nocturne rulebook does not mention using an Heirloom when the appropriate card is in the Black Market, Donald X confirmed that you do:


  Everyone's favorite rules question: If these kingdom cards are in the Black Market deck, are the Heirlooms used?
  
  
    I recommend not putting them in the Black Market deck, but yes, you do all setup for Black Market deck cards.
  


Similarly, the Dark Ages rulebook does not mention Black Market, but if there are any Looters in the Black Market deck, then you include Ruins in the Supply. 

Note that if Young Witch is in the Black Market deck; Black Market itself cannot be the Bane card; because the Bane has to be a newly added 11th pile.