If you follow recommendation #1 you are going to rely on the alcohol content of your beer after primary fermentation to keep any nasties in or on the watermelon (which there will be) from spoiling your beer. This is a common practice when adding fruit to a secondary fermenter and works rather well. This would be the route I would suggest.
#2 relies on the heat from your brew kettle to sanitize your melons. I do not particularly think this is a good route. One reason, your going to lose a lot of the flavor and aroma of the watermelon (which is incredibly hard to get to come through in a beer in any case) if you add it before primary fermentation, especially to water that hot. On top of that, just because the temp is over 170 does not guarantee that you’ve killed the nasties in/on the melon in the first place. In effect you’re losing any real chance of watermelon flavor or aroma while possible introducing infection to your beer. IMHO this would be a bad idea.
You’re only other real option is using watermelon flavor extract. I don’t know that I’ve ever seen it but I bet you can get it somewhere. This product it already sterile and it added to the bucket at bottling or to the keg at kegging. While not giving you the option of using real fresh fruit, it does give you the ability to directly control how much flavor is added with the security of knowing you’re not going to ruin your beer. In my estimation, this is your second best option.
#1 - Add to secondary
#2 - Use Extract
#3 - Add to boil @ 0 min