I'd just do #1 and not #2. The tree is young, if the stobb is cut flush with the root collar, the collar tissue will grow around the cut surface and cover it over time. The cut will start to decay, but because the tree is young and healthy (looking) the decay won't move very far into the healthy wood (see CODIT to visualize this.)
As for sealing the cut surface, don't bother. It would make no difference.
