WP SEO experts: Which way should I set up related-but-different WP sites?

Thanks for your input and advice. I’m going to try to explain what we’re trying to do and hopefully that will help you understand what I’m asking.

We are using WP and a plug-in called DirectoryPress to create a series of local advertising website directories that will be “repeated” for various cities we roll out to. For example, we might have a WP directory website in Dallas, TX… one in Miami, FL… and another in Chicago, IL.

Each local WP directory website will have its own domain name, but I’m trying to figure out the best way to set things up on our server:

OPTION A would be to set them all up under a single domain name and then simply redirect the specific domains to their respective folders. So http://www.DallasDirectory.com would be forwarded to http://www.MasterDomain.com/dallas, and http://www.MiamiDirectory.com would be forwarded to http://www.MasterDomain.com/maimi, etc.

OPTION B would be to simply physically set up different domain names for each city’s directory. So each city would have their own domain on our server. This would be more akin to the standard way you would set up any regular website.

Here’s why I ask: I’m curious about SEO logistics. If the http://www.MasterDomain.com served up all the local city directories, would that be better for all-around SEO optimization than if each of the city directories was hosted on its own domain name and there was nothing connecting all the various cities together?

There’s one more consideration. We actually will have two different directories for each city (2 very specialized niche directories), so if we went with Option A from above, the actual URL for each local directory would be a bit longer (not sure it matters)… something like http://www.MasterDomain.com/directory1/cityname and ../directory2/cityname.

Apologies for the length as I try to explain what I’m asking. But I appreciate any help you can give a WP newbie. I just want to get this right before we start rolling the concept out to a few cities.