3. Till up the whole yard, mix in some dirt/compost, and re-seed the entire thing.
I am certainly no expert but this sounds like the best option if its pretty rocky. You might be able to break it up over time with aeration and composting but thats a lengthy process.
Seriously, just get some Scott's fertilizer and use it a couple times a year.
Not everyone likes to over pay for the Bose\Monster Cable of the fertilizer industry