Option number 2 appears to be common practice (Live CDs by Ubuntu, remastersys iso-images and others appear to be designed like this). The image of the root partition is typically provided using squashfs
. Using overlayfs
and tempfs
, the CD / DVD can be supplied with a writable appearance which supports booting a normal system.
I've written a detailed guide about creating such a DVD from a Ubuntu Core USB stick in this answer to a more specific question.