I voted for #1 but totally agree with jfrazierjr... you can use real names/places but shift the "truth" of the world we know however you like... this will give people a point of reference in "reality" that will springboard them into your world.
Making up names/places will make it harder for some people to get into "the mood"... as completely fictional worlds have a slightly smaller audience.
Just my 2 cents...
These are two of my favorite "what if" scenarios
-Chris