Please advise - which option is better and why?
1) Three hard drives in RAID 5 to store the OS and Data or
2) Single Hard Drive for the OS and RAID 1 for the Data?
It depends. Do you mind reinstalling your OS and programs if your hard drive fails? Do you value ease of recovery or performance (when the OS drive dies)? How would you implement the raid (discrete controller/motherboard/software)? What size are the drives? What do you normally do (lots of writes, lots of reads, etc.)?
Take a look at http://en.wikipedia.org/wiki/Standard_RAID_levels
for some information about RAID.
1) provides redundancy for the OS and data, but poor write performance for small writes (see the Wikipedia article). Depending on your RAID controller, you may be able to expand your RAID size just by adding more drives.
2) provides redundancy for the data only, good performance (see the Wikipedia article), but may lead to wasted disk space (for example, if you have 3x1TB drives, you are not going to need 1TB for your OS).
If they're all the same size, RAID1 on the OS/programs and a single hard drive on the data. You get better read performance on a RAID1.
Do not do this. What do you value more, possibly better read performance or the security of your data?
Option RAID 1 all of them if same size because if you loose 1 drive you can replace it without shutting your server off if they are hot swap drives.
what if your OS disk dies on christmas eve and no place you can get another SAS / SATA whichever you use before 2nd or 3rd jan and you need critical data?
with RAID 1, it will run, you can get the data and replace the drive even by end of Jan next year you have what you needed and when you needed.
Hope it helps
You can still run your system with a drive failure using RAID 5.