Like NetGoonie said go for option 1 and 2.
Option 3 is defenitely a no.
If you don't have any knowledge on how hosted free sites work you've come to the right place here, feel free to ask away
What you can do for starters is check out other affilte programs that offer Hosted Free Sites and see how they handle it. The perfect place to start is Chop's
http://www.hfslinks.com, here you'll find almost all free sites ever build by 80+ affiliate programs.