I think the issue here, and perhaps the deciding factor between 2 & 3 is that the original story names the "alleged author" (basically of the villain of the story) and my read of the retraction is that they can't confirm that the person named as the villain is, in fact, actually the bad guy.
So you can have option 3.5 and keep it published with names removed to protect the "could be innocent" or retract the entire story as they've done.
Your intermediate solution of wiping just the names is not necessarily my preferred solution (I'm honestly undecided), but I endorse it as strictly better than removing the entire text from the internet.
So you can have option 3.5 and keep it published with names removed to protect the "could be innocent" or retract the entire story as they've done.