The first one sounds good to me in your case, yes. And there is always the ‘other’ option (at least there was one when I had to cancel last, wich was quite a while ago, so I can´t be sure, as they like to change things ) where you get a box to explain the reason if nothing else quite fits. I don´t know if a ‘real person’ is looking at cancellations with ‘other’ as reason though.
I can´t guarantee that it doesn´t have any or at least not much effect, of course, personally I didn´t notice it having any effect. I’m pretty sure though that you will be able to find posts here that say all cancellations affect your ‘standing’. YMMV, I guess.
The catch is though that there is nothing more I can see that you can do than cancel by choosing a ‘good’ reason if ‘negotiations’ with the buyer don´t work out and you don´t want to do part of the work without being compensated for your time, so you can as well just shrug it off and hope for the best, from my POV, life is too short to worry about things you can´t change ;).
But honestly, seen with Fiverr’s eyes - if a seller cancels orders because they bite off more than they can chew (either just by accepting every order and never setting a limit even if they know they can´t possibly manage to deliver on time, or by promising things in their gigs and then not being able to do it if a customer actually asks them for it and such, which I suppose are labeled as ‘bad’ cancellation reasons) and then have to dupe their=your customer by cancelling then, sure, that might be a behaviour you want to penalise to keep it from happening too often.
But if a buyer orders a gig that, for example, says ‘500 words for $5’ and then want the seller to do 1000 words for $5, or want a seller to do something the seller doesn´t even offer at all in their gig, or order ‘accidentally’ - no reason to penalise a seller for that, beyond letting their lower completion rate serve as a reminder to do anything they can to make everything as clear as possible in their gig descriptions and communication with the clients.
Once I am sure that my gigs or custom offers are clear on everything they offer and my communication is clear as well, I simply refuse to let that rate bother me.