What sort of crazy ignition gimmick is this?

If I remember correctly, it just activates and deactivates the Capacitor Discharge function. It should run in either position. You would deactivate the unit in order to set the timing- there was a chance the higher output could burn out some of the older timing lights, especially the inline ones (as opposed to ones with inductive inputs, some of the early ones of which were also kind of susceptible).