I much prefer option two - the best thing about this story is that people are acting as "real" people might, and not just in a way that supports a story.
Nobody knows what Lockhart is - you could still hire him. He just wouldn't stay so long.
As for the conjured snake killing someone - I don't see that the parseltongue reveal thing has to happen at all, at least that way. Would this Harry go to a dueling demonstration by someone as obviously incompetent as Lockhart? Incompetent fighters can be a lot more dangerous when sparring than skilled ones because they're unpredictable.