The spot touch up will give you the best results, but it's more involved than you described. What you want to do is repeatedly apply paint to the chips and scratches (allowing each coat to fully dry) until it builds up to just slightly higher than the surrounding painted/powder coated surface. Then you sand it down flush using some fine wet-dry sandpaper affixed to a small block of wood. Once you get it flush, lightly sand with some ultra-fine wet-dry and then polish with some automotive polishing compound. If your color match is good, the touched up areas will be nearly indistinguishable. However, be aware that this is a time consuming and labor intensive process.

Stay away from rattle-cans (unless you *really* know what you're doing -- in which case you wouldn't be asking). Even if you get lucky enough that it doesn't look like crap initially, within a year it will likely look worse than what you started with.

The best solution is just ride it as-is. The patina adds to the character of the bike. A mountain bike without chips and scratches is a sign the owner has never used it to its full potential If the chips/scratches are down to bare steel, treat any surface rust and then periodically wax the frame with some inexpensive automotive spray wax to keep new rust at bay.