Moral Conundrum

I work at a fairly small company, about 15 employees. I have some supervisory responsibilities at the company though at the moment there is only one person under that limited authority. Today my boss came to me and put me in an awkward position and moral dilemma. My boss informed me that the one person, who is the only person I have to back me up when we're busy, he was going to "let go" because it "wasn't working out." You should realize that this is the 4th person we've had in that position in less than 8 months and the individual in question is the most competent, hardworking person we've had in the role. My boss said it "wasn't working out" to the other three people after two weeks, one week, and three months respectively.

I pressed my boss to know why and he admitted that the person is very capable and hadn't done anything wrong. The reason he wanted to let them go is because he had a bad feeling about the situation.We wound up having a rather lengthy discussion about why he wanted to fire them and why I thought he shouldn't. At one point I made what I feel is a rather accurate analogy of "you were looking for a needle in a hay stack and found a crochet hook, that's pretty damn close," but at the end of the conversation he said he respected my opinion but he was still going to do it.

I go back to work, feeling generally shitty about having to take on all of this other person's duties yet again, and ten minutes later my boss is pulling me aside again to say that he's thought it over and he's going to keep her for now because of my recommendation. We talk for quite a while longer with me emphasizing that it's really his decision and I will respect what he says (mainly because I don't want to lose my job if she winds up performing poorly).

He asks for me to come tell him if this person is/starts saying anything bad about him behind his back. The truth is, everyone in the office complains about him behind his back, including me. He is a nice guy but very eccentric, seems to have ADD, and is an unreasonable micro-manager. We aren't malicious about it, but whenever he does something that annoys us we sigh and shake our heads because we just know that's the way he is. I now have to walk that fine line between appeasing the boss and ratting out my coworker, who I also consider a friend.

Now I am left wondering, should I tell my coworker that they were minutes away from being fired? This is my moral dilemma and the problem with any work friendship. I have three choices.

1) I can become the toady of my boss (or a proper assistant manager if you prefer) and rat my coworker out without warning them of the imminent danger and probably isolate myself from the rest of my coworkers.
2) I can tell my coworker everything and my boss nothing and run the risk of them ratting me out in anger if/when they do get fired or the tables otherwise turn.
3) I can continue to walk the tight rope, telling nothing on either side. My coworker will be none the wiser but I will feel guilty if they get fired without being warned. My boss I will have to keep happy by diplomatically telling him enough to hide the reality.

I fear the only possible choice for me is number three. My effort to balance empathy with obligation means that I can fulfill neither.