The correct answer is the first option:
"The allusion shows the narrator's feeling that his love for Mangan's sister is reverential, almost holy."
The narrator is deeply in love with Mangan's sister. The allusions to the Roman Catholic religion shows the intensity of this love. In a reflection of the Petrarchian and romantic love, the narrator tells us he spends his days admiring her and longing for seeing her.
The metaphor of the chalice through a throng of foes implies that his love and infatuation for her borders idolatry.