How should I frame in a large window opening to install a smaller window?
If you were framing this opening from the start, figure 1 is the way it would be done. I would go that direction so it will make sense to anyone working in this area of your home in the future.

Did you consider the possibility of centering the new window horizontally in the existing opening? That may result in a better proportion. In that case I would still use the approach in figure 1 with new vertical sections on both sides extending the entire height of the opening.