Should I be using SqlDataReader inside a “using” statement?

The second option means your reader will be closed in the event of an exception after it has been created, so it is preferred.

It is effectively transformed by the compiler to:

SqlDataReader reader = command.ExecuteReader();
try
{
    ....
}
finally
{
  if (reader != null)
      ((IDisposable)reader).Dispose();
}

See MSDN for more info.