What is the right course of action here?

Your answer is correct because German traffic rules require that when facing a stop sign at an intersection, you must come to a complete stop on the stop line and give right of way to other vehicles as indicated by signage and priority rules.

In this scenario:

1. You must stop at the stop line (option 2) before proceeding. This is mandatory at a stop sign.
2. After stopping, you must allow the blue car to pass first (option 1) since the sign indicates that traffic from the right has priority. The blue car is coming from the right, so you must yield.

The red car has a yield sign, so it must wait for both your vehicle and the blue car to pass.

Only after stopping and yielding as required, are you permitted to continue safely. This ensures clear right-of-way and accident prevention at intersections with stop signs in Germany.