Hello, your guidance with this question would be highly appreciate it.

I live in NJ and work in NJ. My wife lives in NY and works in NY. She did not live in NJ for any part of the year.
We plan to file as Married Filing Jointly (MFJ) for federal taxes but we are not sure how the state taxes would work. From what I have read it looks like we can either file NJ state taxes where I will be a resident of NJ and must declare my worldwide income to NJ while my spouse is nonresident of NJ and does not have any NJ income. The same scenario for NY where my spouse will be a resident of NY and must declare her worldwide income to NY while I am a nonresident of NY and do not have any NY income.

The other option I read about is filing federal taxes as MFJ and state taxes as Married Filling Separately (MFS) in which case I will file NJ taxes as MFS and my spouse will file NY taxes as MFS.

Can you please tell us which is the correct way to do it and if one way is better than the other which would you advise us to use?

If you file joint return, for NJ you are resident and will report all your income. Your spouse is nonresident and does not have NJ income.
Same treatment for NY.

If you file joint return, for NJ you are resident and will report all your income. Your spouse is nonresident and does not have NJ income.
Same treatment for NY.

Correct - and the way you do this is by each of you filing as Married Filing Separately in your resident states. That way each person reports only his/her income to their resident state. You can file as MFS even though you filed as MFJ on your federal return as long as you each have resided all year in separate states and you each have income only from your resident state.