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What is "Show option to add to favorite" ?
What it is:
If you have "Display what is being played" turned on (checked) and if you also enable (check) "Show option to add to favorite" in your personal settings, it's possible to add tracks you're listening to to one or more favorite lists.
With these two settings turned on, you can add tracks to favorite lists in "real time" so to speak.
Something to consider:
If you also have "Suggest favorites based on tags" turned on (checked), a number of suggestions for appropriate favorite lists will be displayed.
In order to see this option, "Suggest favorites based on tags" must be enabled in the general configuration.