explain bad grades to recommender
By asking for all of this information, it sounds like this professor is trying to write you a personalized letter, which is usually a good thing.  She's helping you out.
Therefore, it's completely reasonable to take option 1 and simply explain your bad grades to her.  I wouldn't go overboard here - she's not making a hiring/admitting decision regarding you.  But a few lines giving her some context for all the material she asked for is not at all amis.