Dear Salman bhai,
Congratulations on getting the document update request and on the birth of your son.
Out of the three options you have mentioned here, in my personal opinion, the second option is ideal because, it is in your best interest that CIC should process your application on time. However, getting a travel document like passport is not in your hands and is time consuming. So, you have to honor CIC request as well as save your application. If you write a short letter to CIC explaining the delay in issue of passport ,while you submit all the remaining documents, I am sure they will understand and give you some time extension. Yes, it may delay the whole process by another month or so. But, if you simply request for time extension, they may not be very happy about it nor entertain you. Not responding and waiting for all documents to arrive may end up in CIC closing your case citing - not interested in pursuing application!!! Hence, in my personal opinion, second option with an explanation letter should help you. Other members, please comment. Thanks