I think by many standards that is a very large emergency fund - but each has their own tolerance for risk.
Option 1 gives you a guaranteed return but the money becomes illiquid. What kind of mortgage is it? 30 yr fixed rate? If so a lot of people here wouldn't pay that down and would prefer to invest the money elsewhere.
Option 2 keeps the money liquid, so it can act as a extreme-emergency fund, but of course the value is more volatile.
What kind of IRAs are you doing? Roth? If so, remember that Roth contributions can be distributed at any time tax and penalty free (only earnings must stay in for the long haul). So a Roth IRA actually can act as a super-extreme-emergency fund. Certainly you wouldn't normally want to remove that money, but putting money in there gives you more return and tax free return as well.
So maybe that will help you think it through. It sounds like you have some peace of mind from a large emergency fund. Maybe you should view it instead as a number of stages of emergency. Some amount liquid in savings for more likely emergencies (short term unemployment, big unexpected expenses). Some amount liquid but in a better if riskier investment (your extreme-emergency fund, if forced to draw on it when the assets are down will hurt but you still have access to a fair bit of money which you don't anticipate needing in any typical emergency). Finally your Roth IRAs as the super emergency backstop.
I think when you look at this way you will feel more comfortable getting more of your current emergency fund out working for you earning better returns.
