I chose option #1 as I like having no space between paragraphs and in that case, you do need the indent. I like a 1.2 or 1.1 em space for the indent. The 5% that a lot of LIT and Mobipocket use is ridiculous.
If you do want to use something other then space to designate a section break then try the following...
• • •
But for the first paragraph of the the chapter and the first paragraph after the section break, I prefer no indent. That way you know where you are based on the no indent.