I'm going to have to go with option 1. That's what they are meant to represent. Coup de grace and massive damage are just attempts to cover the inherent flaws in the system. That's why I prefer the VP/WP system in Star Wars, or the system from Earthdawn.
I'll say this here as well as in the Class Defense to AC thread - HP DO NOT REPRESENT THE ABILITY TO AVOID AN ATTACK. That's what AC is. If the attack "doesn't hit, but is barely dodged," resulting in "fatigue represented by hit point loss," then why do effects such as poison, ability drain, and energy drain work?
The clearest answer is to say that it isn't realistic, and move on. D&D isn't supposed to be realistic. That's why we play it. 'Cause it's more exciting than most of our realities (although my reality is very exciting). So I prefer to just ignore it and move on, thinking of it as an abstract concept during actual play.
btw, I'm the one that reactivated the Class Defense to AC thread. If you couldn't tell. My group often enjoys realism, so we've adapted the VP/WP system for D&D. It's really up to the preference of the group, though. If your group likes anime with super-powered attacks that should obliterate the heroes, but merely injures them, then classic D&D HP is for you.