I love how you start with a modest and realistic budget and ask for advice about two options you are considering and a few posts later people are recommending that you recable your headphones to balanced and buy a balanced Woo amp. How does that meet your budget requirements? Do people on Head-Fi have ADD?
Personally, I would go with a separate DAC and headphone amp, I would avoid the Benchmark as it is not very musical, and I would go with a decent tube amp. So I would recommend option 1.
That option also gives you a reasonable upgrade path down the road as funds permit. For example, at some point you may want to upgrade your old DVD player to a better transport (Oppo, possibly), as the DVD player as transport will become the weakest link in your rig. (Don't believe that the transport becomes completely irrelevant once you have a separate DAC.) Next, I would roll tubes in the Woo to tailor the sound to your liking. I am sure you can find tubes that sound very linear with the Denons at a reasonable price. Jack Woo may even have specific recommendations. You could also talk to Vintage Tube Services, as the owner is highly knowledgeable about affordable tubes that compete with ultra high-end NOS tubes. Finally, down the road you could always have Cullen Circuits mod the PS Audio DAC. (Or you could upgrade to the Perfect Wave DAC if you really want to go crazy.)
In any case, you will start with a very good setup. Down the road you can progressively make affordable changes if desired to tweak your system for the better. Going balanced is about the last thing I would consider at this point...