Second option is better than simply nerfing the base damage of the ability. But you'd have to compensate for a lack of AoE somehow - every class gets a useable AoE, Knights/Warriors shouldn't be the exception (though I know that Combat and Watchman spec barely ever uses Sweep anyway). And if you mention Cyclone Slash I'll drown you in a bucket of yoghurt.
About cyclone slash...
In all seriousness tho, i would like to point out that a Shadow/Sin's AoE (Lacerate) is just as weak as Cyclone slash, it is just 360 instead of a cone, but can only hit 4 people and if you mention the new overload I'll pull you into my bucket of yogurt and drown you with me