Option 1 is right. Here is the solution.

$\left( \dfrac {1-\overline {A}\cdot \overline {B}} {1+\overline {A}\cdot \overline {B}}\right) =\dfrac {1-\cos \theta } {1+\cos \theta }=\dfrac {\sin ^{2}\theta / 2} {\cos ^{2}\theta / 2}=Tan^{2}\dfrac {\theta } {2}$