Neither. The lyric was "we were stupid to jump in the ocean separating us." This is a metaphor referring to the fact that she (Taylor Swift) was from America and that her current boyfriend was from England. Stating that getting into a relationship like that could be difficult and thus was maybe foolish to have gotten into.

Neither of those. It means that they jumped in the ocean, but she (now) knows that this was a stupid decision. Jumping in the ocean is dangerous and stupid, and she's aware that they shouldn't have done this. Here's a similar example. "I was crazy to turn down the job offer". This means that you refused that job offer. But you realise that turning down the job was an act of craziness on your part: you know that you should have accepted it. Only a crazy person would refuse such a good offer.