It almost certainly has to be the second option and the list in the Specialist class description is just confusing. Unlike other skills, Sneak Attack does not take a roll so it doesn’t read 1 in 6 chance of success. The pips for Sneak Attack simply keep track of how much better you are at attacking an enemy who is unaware of you.
If option one was correct, if would mean that 0 pips equal x1 to damage (which has no effect). One pip would then mean a x2 bonus, two pips would be x3... ultimately 6 pips equaling x7. This inelegance goes against the rest of the design of the game. It seems much more logical if number of pips equals the multiplying factor 1 to 1.