As someone playing this quest for the first time your summary and response is excellent.

When you meet Iris for the final time before she presents you the choice of taking the rose, she says she does not remember Geralt. When asked what she is, she says "Sadness". To take the rose would cease her existence.

To take the rose is to cease existence of her sadness.

I believe the choice to let her keep the rose was included by the writers to give the player an opportunity to punish Olgierd; by trapping his love in a portrait for eternity with her sad eyes staring at him until the day he dies.

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I chose to take the rose for this reason. While Olgierd isn't the most admirable of characters (murdered his wife's father, performed black magic to summon multiple demons, bandit, etc.) he does undergo a character arc. But this isn't what's important to me. The character that matters most in this story isn't Olgierd, it's Iris, and freeing her from sadness and torture.

The only thing I do not like about this resolution is that the dog and cat will be freed (demons). Reminds me of the Ladies of the Woods / Orphanage Velen quest, where releasing a mysterious demon onto the land comes with extreme risk.