Oracle Patching & Database Upgrade - Which Order
3&lt;4, I opt for option 2 approach. 

This is also what Oracle instructs us to do in for example this document:

http://docs.oracle.com/cd/E11882_01/server.112/e23633/upgrade.htm#UPGRD12394


  After you have installed the software for Oracle Database 11g Release
  2 (11.2) and any required patches, Oracle recommends that you analyze
  your database before upgrading it to the new release