I don't know your Fiance so I don't know what kind of person he is but I would go with option 3 too. I agree that he needs to EARN your trust back. It doesn't sound like it took much convincing for him to cheat on you so he might have been thinking about doing it on his own anyways without peer pressure from his friends.
I've been cheated on and was told that it was a lie (was told by my ex's friends that he had) and I believed him. Well turns out he had and I wish I hadn't taken him back.
This is coming from a woman's point of view as well. I have been with my Fiance for 4 years and we have a son together and have never had any issues.
Good luck! You are the only one that know whether he will be a repeat offender. Listen to your mind and not your heart girl!