Ahhhh, I've always used the second approach myself, IMHO it works best because when the other person is speaking is clearly indicated by the dots ("...").
While I generally employ three dots, a longer period of speech by the 'unheard' party can be indicated by four or more of them.
AFAIC it's both challenging and fun, attempting to imply what the 'unheard' individual is saying via the other one's conversation with him/her...

--C.K.