The correct answer is the first option: The words each character says are enclosed by quotation marks.
Anything that a character says is always in quotation marks. This makes it much easier for readers to follow the characters' speech and understand the story.
For example: As Sarah closed her notebook, she accidentally gave herself a paper cut. "Ouch!" She exclaimed.
The word "Ouch" is enclosed in quotation marks which visually shows that the character spoke.
One of the only instances that a character's speech appears next to his/her name is in a play. Plays are often written with few actions and lots of speech. This is a format in which the character's words will appear next to his/her name.
Words that the main character says are also always in quotation marks, not italics or brackets. However, often times, words that a character thinks/says to himself may appear in italics.
Words that address a conflict are also never in bold or heavy black type. Conflict is written in the same format as the rest of the dialogue.
It should be near David and Ed
