The correct answer is that there is no correct answer. Both methods are acceptable
Method 1 - Front arms above the head the arms are are driven simultaneous forward and to the side (till about 60deg or even at 90 by some).
Method 2- Arms are swung forward and down like into a front tuck somersault, with the hands being placed on the thighs
I personally prefer method 1 because
Even thought this method tends to encourage a slight tight arch in the front layout, which some coaches don't believe is effective for twisting, i think on the contrary. Twisting with any kind of arch is no easy task. The body naturally adopts a straight configuration when the twisting is initiated with this method, and it also allows for a greater potential for twist generation. It allows for easier linking of skills as the arms don't have to move very much between skills (like front layout, front tuck). And it serves as an accelerator skills due to the reduced inertia due to the slight arch, and accentuated heel drive. It also tends to more favorably transfer to vault. Downside is that it is harder to learn, and thus if you want to start someone of twisting early on this method can be a little restrictive. However i don't personally see that as a problem
Method 2 tends to make skill connection harder. Because the arms have to be raise 180degrees to before going into the next skill. This is hardly ideal. It is much easier to do, and has a good continuation in learning sequence between front tuck, pike, and layout as the arm action stays the same. Twisting is quite easy, but its not optimized. It tends to encourage gymnasts to dip the chin into their chest (which sucks! if you are trying to teach them to have a neutral head position in a layout). It also tends to look uglier for me personally.
However both methods can be used effectively. For example i have 1 girl who uses this method because she struggles way to much with Method 1. She is loose in the back, and just does not have the self discipline not to force an exaggerated arch. I could continue banging my head against the wall, doing all kinds of conditioning to try and stop her from doing it the way she is. OR! i could simply change the methods to better suit her. Hence option 2. She learned the method 2 layout very quickly and has been of much greater benefit.
In short pick and choose depending on the gymnast, skill to follow. However i would not say one method is more wrong than the other. However each has their pros and cons.
I've done both. I did Method 2 for awhile and switched to Method 1 kind of when I started twisting past fulls and trying to connect twisting saltos. I prefer Method 2 and that's really what I tell people to do now, but I could do layout layout using Method 1 and it looked all right, but it was definitely harder and the second lay could be iffy. I couldn't do layout-full (well not very well anyway) this way and that's when I changed.
I prefer to teach method one--with the arms going from up to out to the side. I support this method a more because it seems to encourage the gymnast to keep their tight arch/straight layout shape. Whereas, I've seen gymnasts pike and close their body when they use method two (bringing arms to the thighs). I used method one, and I was able to do layout-layout, layout front full, etc.