There are 3 options to look at here. 

The 1^st option is easy to set up but it is not supported by X3, it would also require SMTP authentication making it a non starter. The outbound mail will require to use the same email address for the “From” address for all emails and would consume a mailbox licence for office 365. This could also limit the number of emails sent in this manner. 

The 2^nd option is also easy to setup but will not allow the sending of emails to outside of your company/organisation.

If your notifications don’t need to be sent out of the organisation, you can use the SERMES parameter in X3 with smtp.office365.com. this is a great control option to restrict external mails from the system. 

The 3^rd option is the only option to get internal and external mail functionality, it will require the setup on a mail flow connector within office 365 using an O365 admin account.