Enchantment Legal only because of it's Effect. Remains on target?
Choice number 2 is the correct one: the Progenitus is an Insect with no abilities except Indestructible and the Aura stays attached to it. Rule 613.1 says


  The values of an object's characteristics are determined by starting with the actual object. For a card, that means the values of the characteristics printed on that card. For a token or a copy of a spell or card, that means the values of the characteristics defined by the effect that created it. Then all applicable continuous effects are applied in a series of layers


The key point is that determining the values of an objects characteristics involves applying all applicable continuous effects. Also, since we start with "the actual object", any effect that causes Progenitus to lose the ability is applied after its own ability, it ends up without the ability no matter what the relative timestamps are. So, as long as the Aura is attached, whenever state-based actions are checked, the Progenitus doesn't have Protection, so the Aura stays on.