If you do decide to let him stay in your house, make sure you do set up some guidelines. I think it is OK for you to say that you don't like him to contact OW, that it is hurtful to you, and that if he insists on it, you don't want to hear about it. You don't want him to have to lie and sneak in order to get what he thinks he "needs."
Option 3 is basically like a trial separation in the same house. You share chores and expenses, don't ask a lot of questions, and you do your own thing when you aren't being the "responsible parent." The only reason I am suggesting this is that I think your H will agree to whatever house rules you make for a while, but he won't comply with them. And he will resent you for imposing them.
Again with the caveat that you can ask him to leave anytime if its not working out.
