How to handle an old competitors domain i just bought?

Hi BalckHater's
I search around for a while in the forum, but i found many different opinions and still i can't form a way to action so i will put my question and if someone can help i will appreciate.

I just bought an old domain from one of my competitors.
The domain was deleted, de-indexed from g00gl3 (since it is deleted for some time...), no many backlinks (according to SiteExlporer) and of course no PR.
My competitor use this domain when he start his presence on internet and keep the domain for some years until recently when he change the domain and drop the old one although it's a quite good domain and can generate traffic, especially from a quite popular youtube video! (i think the people who SEO serve my competitor doesn't do a good job on this point...)

I decide to buy it since i believe i can get some targeted traffic (the truth is that my competitor has a brand name in the market, bigger than mine or from anyone in the market...).
So here are my thoughts, please comment and give advice.

1) Immediately 301 redirect the old domain to my main money site

2) Buy a small hosting service (different IP than my main site) Add a couple of new original articles. Try to index the old domain again. Add the old domain to gOOgl3 WebMasterTools (different account than my main site, just in case - or is this a bad idea?) , fix all the incoming links using redirection from .htaccess or creating new pages with similar content and finally after some time (how much????) redirect the old domain to my main site and declare this redirection to WebMasterTools.

I repeat that the only i can get from this old domain is targeted traffic. No many backlinks, No PR. So i'm waiting for ideas.

Thank you

You know how they say,handle with care...

check domain anchor text and from where the few backlink it has is coming from

Well since there no was many answers i decide to go with plan #2.
So i build a small 4 pages website on a separate from my money hosting server, i also add some original images and an original video.
I add the new site to the same webmaster tools account where is the money site i plan to redirect and i fix through .htaccess the old backlinks so now they go to the new material.
After less than 12 hours g00gl3 index the domain and all the new material!

So now how long i have to wait until redirect this old domain to my money site?

And finally, i read somewhere here in the forum that you have to continue build backlinks even on redirected (old) domains. Is that truth?

Waiting for ideas.

Less than a week and i get back the PR. A small PR1 but not bad at all.
All errors are fixed and redirected to the new pages and everything looks OK.
Is time to do the final move and redirect the old domain to the new one or i have to wait more?
I also have a basic free hosting plan from the register i buy the domain, so it is better to keep the old domain to this separate hosting server and redirect trough .htaccess or php or redirect from Webmaster Tools?
Any Ideas?

yeah i would be really careful with this.

fsatark said:

And finally, i read somewhere here in the forum that you have to continue build backlinks even on redirected (old) domains. Is that truth?

Click to expand...

Yes that is true. If you stop, the domain will slowly start to lose its value.

ShadeDream said:

Yes that is true. If you stop, the domain will slowly start to lose its value.

Click to expand...

I will do so and hope this is the right thing to do because especially on this issues the opinions are very controversial.
50% of the people saind that yes you have to add links on old 301 redirected domains and 50% that it is a big problem to do so....

Check out this article about 301s...straight from Google

http://searchengineland.com/google-pagerank-dilution-through-a-301-redirect-is-a-myth-149656