Because DMM is applied as you cast the spell, but spontaneous casting is something you do instead of casting the spell, you couldn't use lose the slot after using DMM. You can, however, apply DMM to the CLW you cast in its place (that is, you get a Cure Light Wounds heightened to third, not a Cure Serious Wounds). Your option B is correct, but your description of the order in which things happen is wonky.