Quoted from the EXPANDED OWNER’S MANUAL REV. A: "Note also that USB audio and Bluetooth audio streaming (see page 41) can not be used simultaneously. Note that Bluetooth audio streaming and USB audio (page 44) can not be used simultaneously."I found that these statments are valid for your Option Three (LINE OUT set to STEREO) as the music playing through AUX also appears in the recorded track - with excessive Gain causing signal distortion. There are some stereo effects that can benefit from the LINE OUT set to STEREO like the Stereo Tape, the Stereo Echo Filter and the Ping Pong Delay.