To start a campaign, you really don't *need* a setting, coherent or not. All you really need is an adventure, perhaps a town as a base of operations, a vague idea about the local culture (Norse, medieval, Aztec, etc.) and climate (desert, temperate, jungle, etc.), and away you go. All the rest can be filled in later, as you go along.
Both options, truth be told, give more information that I as player would expect to get when going in to a campaign. All I'd expect could be as little as "Desert climate, somewhat Egyptian culture where you're starting, Hobbits are banned, metal armour is rare and very expensive thus you cannot start with it. Roll 'em up." Simple, huh?
The story will unfold (I hope) through play.
I agree with you about not needing a setting to be in place to start play.
As a DM, I prefer to start with the bold strokes done -- I'm running Greyhawk, so I know most of what exists -- plus an overall "these are the current megatrends" view.
Then I start from the bottom up, adventure by adventure, building the local area mostly from published adventures, but altering so it's coherent in feel and so that the trends are pulled through (even if they were not there in the original) to fit with what's gone before and what I'm planning in the future.
For example, I'm finishing up running "The Last Baron" by Paizo. In my campaign, the town it's set in is the closest town to the Ket/Bissel border (on the Bissel side -- the home land for the PCs') and perhaps more interestingly, closest to The Lost Caverns of Tsojcanth.
The border of hostile states idea fits what was in the adventure to begin with (one reason I picked it). But I've also added in links and clues connecting back to groups encountered in 3 previous adventures for this party, and a whole lot of backstory from a previous campaign where the previous party (including two current players and one current PC) did the Lost Caverns. The main villain is now motivated by obsession with Drelnza, Iggwilv's daughter and treasure in the Lost Caverns, who in my campaign is missing but not dead. In the original, he was motivated by . . . well, mostly just being a bad guy.
The original material had factions, but not the factions and motivations I've converted them to -- in most cases, it's close, but the Greyhawk essence makes the Asmodeus cult something more than JUST another evil cult. I've altered it so it has hidden connections stretching all the way back to the first villains in the Keep on the Borderlands, if the PC's ever figure it out. Bwahahaha!
I'm writing the campaign more like "Enterprise" (hey, I've kinda got some plot arcs and themes, but I'm also shooting from the hip and linking to whatever's gone before as often as possible) than Babylon 5 (it's all figured out in advance). Which kinda makes sense, since this way the campaign can follow the PC's around, while being more than just "some adventures I felt like running" . . .
Option 2 actually reminded me of the 4e campaign I'm a player in. I suspect the DM doesn't have a setting in mind at all (he doesn't seem to care about settings), so the default "points of light" works best -- he doesn't need to bother with setting. But I might be wrong. We had a VERY unusual session where we mostly talked to NPC's while investigating, instead of just killing stuff, so it could be he's hankering for more than setting-less hack & slash too.
Bottom line, I picked Option 1 because it was clear that DM wanted to HAVE a setting, whereas in Option 2, I wasn't sure I'd get anything but dungeon crawling.