The devil is in the details! Again I'm not going with one of your options, so feel free to disregard. I would use soill along with boulders scattered about and a substantial amount of landscaping to make it all sort of blend in. I might also work a casual set of steps or a dropping path down through it for access. The kids will surely run through any large uninterrupted area of plantings. The path could continue on the flatter ground around the backside of the tree and come up on the left. Creating a bit of a potential destination down there as well. I always try to think master plan in addition to solving a problem. Could be done in stages if desired.
Our pool was built so the backside is about 3' out of the ground with the ground continuing to drop away after that as well. All the dig spoils were placed/compacted outside of the lower retaining wall. I am in the process of landscaping it, not like I envision yours, but still with soil and plants, no outer walls. Ok, I'm done with my landscape design exercise for the night.
It's cheaper for me to throw out ideas for someone else then to plan for myself and have to implement it.
