Hole for the disc type knob potentiometer
The typical way of doing it is this:

There's space to the right for the thicker part of the dial.
You seem to want a narrower slot so that just the dial but none of the mechanics protrude into or through the slot.
That leaves you with really just one option:  mill out the inside of the housing by a millimeter or so in depth around the slot.
That seems to be your first option as given in the question.
The second option you list will collect dirt and be uncomfortable to use.

I'd just do it the way folks have been doing it for decades - that's the solution shown in the picture.
You want a narrower slot so that just the dial protrudes.
That narrower slot means more precision in placing the potentiometer.  It will have to lie exactly in the same spot at exactly the same height above the PCB for it to work in every device you build.  That means positioning and soldering to less than some fraction of a millimeter in every device.
The wide slot doesn't look as cool,but it is easier to hit when you build the device.