What is the right thing to do?

You chose answer 1, and that’s correct: you must give way to the green car.

This situation is an uncontrolled intersection (no priority signs or traffic lights visible), so the basic German rule applies: “right before left” (rechts vor links). The green car is coming from your right, so it has priority over you, even though you are already indicating to turn left.

The red car comes from your left, so you have priority over it under “right before left.” You do not have to let it pass first; it must wait if your path would conflict. After the green car has gone, you may complete your left turn, and the red car will then proceed when the way is clear.

Rule of thumb for similar questions: at intersections without signs/lights, always check the right side first; any vehicle coming from your right goes before you. Turn signals do not change priority.