What is the right course of action?

Your answer is fully correct.

In this situation, you have to allow the cyclist to pass through first because the cyclist is already in the intersection and has the right of way. Additionally, you should forgo your right of way to avoid blocking the junction; this means you wait and do not proceed until the cyclist has safely passed.

This rule helps to prevent traffic congestion and ensures safety in intersections by giving priority to those who are already inside or moving through the junction, especially vulnerable road users like cyclists. Turning left before the cyclist (option 3) is not allowed because it would cut off the cyclist's path and can cause an accident.

So, the correct behavior is to wait for the cyclist and only proceed once the way is clear, keeping the intersection free for other traffic.