It enables the optical output - for a home theatre amp for example.
Basically you want PCM for two channels since it doesn't have the bandwidth for PCM 5.1, and then dolby for surround. But the best option is PCM over HDMI if you want to have it hooked up to a multi channel amp.
Also, no need to have speaker shifter enabled. Same goes for EQ, especially when it has default setup. Like I said earlier, as little processing as possible.
For music disable dolby headphone as well and use two channels.