This doesn’t mean Republicans want to go with option C, or that they like option C. It instead means their negotiator now has the ability to walk away from a really terrible deal with the President, and that he can therefore demand a bit more from the President in exchange for cooperation on a deal. Option C is useful to Republicans even if their strong preference, for non-policy reasons, is to negotiate a deal with the President.

I think option C is S. 3412, a bill passed by the Senate in July. The short description is that this bill “extends the middle class tax relief for one year and allows tax cuts for the rich to expire.” More precisely, here is what the bill does (Joint Tax table is here):

It extends for one year all current income tax rates for incomes <$200K (single) and <$250K (married); For one year it keeps the capital gains rate at 15% for the same incomes as above; For one year it (explicitly) raises the capital gains and dividends rates to 20% for incomes >$200K/$250K;
It extends for one year other provisions of current law, important and not-so-important: marriage penalty relief and the child credit, education tax relief, and a handful of smaller provisions; and
It patches the AMT for 2012.