Strategy for upgrading large Drupal 6 site to D7
Although both methods are valid, #2 can be painful if you have a lof of custom code in your app. I would consider option #1.  Migration is quite straightforward using migrate module. 

There is a little more overhead than doing a straight-up upgrade but the process is very well documented and well integrated with Drush.  With migrate you can even have roll-backs and migration reports out of the box, all scriptable and quite easily automated.

I have done some pretty large migrations myself with this module and it works like a charm once in place.

PS: No worry for your entity id's, migrate uses the same nid when it imports the nodes.