Ceiling – install 1×6 T&G boards over 1/2″ drywall on 2x6x14′ ceiling joists

OK, lets start by correcting some terms. The structural members you want to raise are not rafters, they are ceiling joists. You are right that because you have balloon framed walls, that has no effect on the top layer of ceiling joists. Changing these joists have no effect on the balloon framed walls. The thing you have to determine is if the ceiling joists are tied to a load bearing partition somewhere near the center of the house. If you have full roof rafters with a ridge board, it is very unlikely that the ceiling joists are tied into any down supporting bearing wall. Raising them should not be a problem if you plan for support of these joists if there is any center resting point, via a knee wall on the center resting support. If these joists span the entire width of the structure, then you can safely shorten them and reconnect them to the roof rafters. They serve two purposes. First a ceiling joist, and second, a collar tie for the roof rafter. I think you will be fine, however, I'd love to see some pics of the attic area with the joists. Good luck.

With option 2 you have twice as much seam length running down the center of ceiling joists. This can be a real pain to keep everything aligned, especially when you have roof braces, overhead door brackets, and other structures holding the truss members rigidly in place.

Also, some brands of drywall aren't designed to resist sag parallel to the mounting lines and should only be installed perpendicular to the framing.

For those reasons, along with what juicestain09 said, option 1 is far better.

One note... unless your wall is very straight, you may want to run the first row on a chalked line 24" off center, and cut both outer rows to fit. Cutting drywall is not difficult, and you may end up with a nicer fit. That said, you have 1/2" of coverage available from the wall panels, so maybe that's adequate.