My work was published before me. What should I do?
Option 2 is the right one.  Do more research that builds on the ideas, advance the field more, and publish that, citing the first paper appropriately.  Maybe they're also doing further work and advancing the field and will publish that too.  If so, great!  That's how science works.  People publish papers and then they and/or others continue building on it.  

While the authors of the first paper could have included you in the acknowledgements, the fact that you had talked about ideas with them isn't necessarily enough to warrant authorship and you certainly can't make the statement that "I am the original author." Unless you're accusing them of plagarism, one of the main points of free exchange of ideas within academia is so that somebody can build on those ideas and develop them out into a publication.  

Imagine going to a conference and discussing ideas with people (incl. those from other institutions) and then somebody takes one of those ideas back and does all the work that's needed to develop it into a formal research contribution.  They publish it, great.  Then you read the paper in a venue for your field and build on the work, citing it and extending it further.  That's basically how it's supposed to work.  


  nobody will believe similar papers are a coincidence or a an independent inventions. (And they would be right. It's not.) I think that in the worst case it can destroy my reputation and career. Or maybe it's a non-issue and I'm worrying too much.


Yes, I think you're worrying too much.  It's fine that you had some conversations with colleagues exchanging ideas, and then cited a paper they published, in your own new extensions of the work.  It is even possible for you to have extensions that are similar to extensions they may be now independently developing.  If your colleagues did a good job of making the path forward from the last paper clear (to an expert in your field), it wouldn't even be that surprising if one or more others were doing a similar extension elsewhere.  Credit your colleagues' publication and move the work on. 

If you're concerned about duplicating efforts in expanding the work, you could consider whether or not you want to formally collaborate with your former colleagues on doing that expansion.  Maybe they just figured you weren't interested or didn't have time when you left, but would appreciate having you on the team for further work (if they're still working on it); it seems they like the ideas you have to offer.
It's also possible they don't even know that you feel offended, especially if they're under the impression that these ideas were generally percolating in the department for a while before they actually did the work for that paper.  They may have discussed the ideas with other people in advance, who are in a similar position to yours, some of whom may still be in the department, and some of whom may just feel happy that somebody actually did that work.  It'll be your decision about whether you perceive enough of a breach of trust to prevent future collaboration or not.