For a moment or two we considered option #2 of extending the hallway in order to create two separate entries into master and new nursery or girls' room, but decided against it. First, it is question of current budget and, second, we want to wait and see how we will need and use the space if we end up staying at this place for that long. The main reason for needing and creating another room at the moment is not so much for lack of sleeping space, but more to accommodate different sleeping times and falling asleep routines that kids have. Our son likes to talk, and talk, and sing, and make noises while he is falling asleep. It can go on for 15 minutes or 1 hour, but I don't think anyone could be falling asleep next to him. So he is pretty much guaranteed to have a room to himself. Girls are newborn, 2 and 10 so they go to bed at different times and oldest one stays longer to read.
Here are sketches for option 1 that we will be adding. Originally I though of having pocket doors, but ever since we had one for our basement bathroom, I am not sure if I am all that crazy about them. One of the questions will be if we are going to be able to center the new door(s) to maximize the light coming through windows and for things to look balanced.
As you can see, this second room will not have a separate entrance but one will have to go through master to get to it. By doing this we are fulfilling our current need, but we don't think we are taking away the resale value of the house - this new room or space can be viewed as a nursery, sitting room, or can even be converted to large walk-in closet. Our considerations were that there was a separate heating outlet (check), light/electrical (check) and window (check). We are thinking of putting two youngest girls in that small space using bunk beds - but we are not there yet.
When looking at the space like this, it seems almost necessary to consider removing that wall across the closets which creates little entryway to master. This would open up the space and make the room appear larger after dedicating chunk of it for a separate room. We would have to check if that wall was structural.
It is still a lot to consider and I've been planning on rearranging our furniture to simulate physically how the space will be in the master once the wall is added. That should give us a good sense if we will be ok with adding that wall.