Building airfare from San Francisco to Milan

Yes, option #2 does come with those accompanying luggage hassles, and your second airline ticket would be worthless if delays caused you to miss the connection. Booking the connection on one ticket on the same or code-shared airline allows you to check luggage through and the airline would put you on a later connection if there's a flight delay. If flying via LHR is not cheapest, have you seen any reasonable options to connect at another European hub city, such as Amsterdam, Frankfurt, or Paris?

Presumably, you're searching using the "multi-city" option, to see options for SFO-Milan and return Rome-SFO; that basically gives you the roundtrip discount, instead of higher one-way fares.

No. You don't buy one way tickets.
What you need is an open jaw multi city fare (i.e. arrive in one city and return from another).

Go to www.kayak.com and select the MULTI-CITY option.

For your date of departure choose:
from: SFO to: MXP

then for your date of return home choose:
from: FCO to: SFO

You will be given numerous options, generally sorted by price (from low to higher). Select the option that most satisfies your needs.

I like to fly directly from SFO to Europe (that is without changing planes in NY or ATL or EWR) and there are several carriers that have no-stop flights from SFO to Europe. Unfortunately none to Italy, but you can fly non stop to LHR, AMS, CDG, FRA, MUC, DUB, ZRH, CPH.
The most options from SFO are to London LHR (British, Virgin, United) and to FRA (Lufthansa, United).
When you change planes in Europe with one ticket, there is no need to pick up your luggage until you reach your final destination. You will have to go through immigration in the first port of entry however.

I don't know about the other airlines, but if you fly British with bags checked through, you do not go through immigration at Heathrow. If your ongoing flight is not from T5( where theSFO flight lands), you transfer "airside" to T3 or wherever.

So you will be visiting Italy. STOP LOOKING AT ONE-WAY TICKETS. You want Multiple Cities or Multiple Destinations from whatever website you're using.

Happy travels.

Booking with two separate airlines for a single trip is risky should the first plane be delayed then the second leg will be lost. Use what is called open jaw or multi city ticketing. Many times that will be cheaper.