Tomcat documentation says:
The locations for Context Descriptors are;
$CATALINA_HOME/conf/[enginename]/[hostname]/context.xml
$CATALINA_HOME/webapps/[we
I haven't found any official documentation, but I have observed the load order to be:
1 tomcat_home/conf/context.xml
2 tomcat_home/webapps/myapp/META-INF/context.xml
Where #2 is the last one applied (so its settings override all previous ones, where applicable).
I have never used the webapp named context files (your option #2).