Can anyone devise any other options in my circumstances? It is such a bummer I have to be in this situation
It sounds like there isn't really a way around the policy, but it's certainly good that you've assessed your other options. I'll comment on each of them with my own thoughts, but you might like to do something similar. Making a pros and cons list for each option over the weekend and talking it out with someone might help.
1. I can do Biology 3/4 in year 12 (so I will not do it in year 11 and will forget most of the content), do the LOTE, Methods in year 11 and 3 other subjects in year 12
To be fair, a lot of the 3/4 content does not rely on the 1/2 content, so this is not a terrible option. You may also be able to go to a 1/2 bio revision lecture at the end of Year 11 so that you bring the content back to the forefront of your mind. There are also the 1/2 bio ATARNotes powerpoints (and countless other sets of notes) which you could use to remind yourself of the key concepts. However, this may be time-consuming and mean that you end up doing a little worse on bio than you would otherwise, depending on how you manage your time.
2. I can drop my LOTE (really don't want to do this since I have massive potential in the subject) in exchange for another subject at school (probably physics)
Physics is a cool subject, but is it really worth dropping your LOTE for? If you are passionate about the language. I say do it anyway! (This is probably your worst option from my perspective, but if there are benefits that you can see, it may be the right decision for you.)
I can do 7 subjects in total (6 at school, 1 outside of school)
This is also not a bad option. Even the seventh subject slightly boosts your ATAR. My current plan will have me finish with seven subjects, possibly even doing 6 in Year 12.) I guess that it may mean that your marks are lower for others if you find that you are needing to spread yourself too thin, which could negatively impact on your studies. You may also feel more stressed about school because of it. On the other hand, you may feel really motivated because you are doing the subjects you enjoy!
Which option is the best?
Really, only you can make that decision. Best of luck!!