is a center channel really necessary??

If you didn't care before, you're likely not going to be miserable without one now. Still, a center anchors the sound to the centered immage, especially for off-axis listening positions.
At very least, you'll still need latest processing for best sound. Video scaling and switching is also a big plus, room EQ's in the latest pre's are stellar improvements, sonically, etc.
If it were me, I'd be at least adding the above, plus subwoofer. Otherwise, I'd keep a two channel setup like before, and put small quality satalites around the room, and hide a woofer somewhere - and add all the above. Otherwise, inwalls all around, and a quality center speaker for the center, plus all of the above - including 2 channel setup.
To simplify, however, yeah, option one.

IMO the Center channel speaker may be unavoidable in situations where your sitting area is wide or when the front left and right speakers do not have very wide horizontal dispersion.

For music no I prefer 2.1. For movies you need 5.1
three up front and two in the rear with a sub. The question I ask is do you need a center in the rear ala 6.1 and I say no

If you are trying to recreate the Motion Picture Theatrical experience in your home, you need a center channel speaker. They have them in the movie theaters. Everything else is a facsimile of the theater experience. Yes some will say that they don't use a center and it works fine. It does but will only hold a stable center image in a very small seating area. There is also the spl level which three discreet channel will put out verses two. Much research went into why three channels across the front were necessary in Motion Picture Exhibition. Logically that should extend to the home.