I know couples who have done A and B successfully, although C is by far the most common scenario. I think it largely depends on what you can afford and if there is a significant other involved for either one of you. If neither of you is seeing someone or would see someone for a long time, then option A is great. It's least disruptive for the kids, and puts all the inconvenience of shuffling back and forth on the adults, where it should be. I know that option C is common, but I hate seeing kids, especially little ones, shuffled back and forth from house to house every few days.
Option B takes a really special couple. I know a couple that had a very large yard and they were able to sub-divide the lot and build a small home on the back part of the lot for the dad. The kids could just run through the large back yard back and forth between mom and dad's house. I think dad does have a girlfriend who moved in. Mom has a long-term boyfriend but he doesn't live with her (he's actually the dad I know in scenario A). There is enough space and trees between the two homes for privacy.
Option C is what my ex and I do, but our kids are older (they were 9 & 11 when we split two years ago and we have two grown kids). We did have to sell my house so we ended up moving from our family home about a year after their dad moved into a small condo. We're still in the same town, but they sleep at my house every school night and spend the night at his house maybe once every other weekend. They have dinner with their dad most weeknights, and hang out with him on weekends even if they end up sleeping at my house. My ex lets himself in and out of my house (which is kind of annoying) so there aren't many boundaries between houses. If they kids want to stay home and he wants to hang out with them, he'll come over and play in the yard or shoot pucks or watch a movie with them at my house.
If I were you, I would try option A first and see how it goes. As the kids adjust and get older, if it's not working and you can afford to have two places that you can each go to (or either one of you has family you can stay with, etc.) then you can adjust. I think that eventually, you will each want a place with some privacy. Eventually one or both of you will pursue other relationships. In the case of my friends in option A, things got easier when the mom had a boyfriend and she stayed with him when she wasn't in the family home, and the dad primarily had the apartment. Option A is the least disruptive and the smallest financial commitment (just the rent for the crash pad, you can break a lease if it doesn't work). As you sort out a long-term parenting plan, as the kids get older, as new significant others enter the picture, you can adjust. You'll probably get to option C eventually, but while the kids are so young, if you can keep them in the home that they know for a little longer, it will help them through the transition.