First, go into the cable box's setup menus and make sure it's set to output Dolby Digital for audio.
Second, I'd use component cables from cable box to receiver, then out to tv, since your receiver isn't HDMI capable. It will make for easier switching, and since the tv channels aren't broadcast in 1080p, it will do just as good a job as the HDMI. Since HDMI carries video and audio, sometimes it will override the other outputs, so they won't work, while using HDMI. That's may not be the case here, but again, it may be.
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the digital out audio is set to cd / optical 1 port but it appears I need to change the source selection on the receiver to recognize it.
Instead of cd, it needs to be set to CBL/SAT, or whatever wording your receiver uses. It may say CBL/DBS instead. Even if you put it on TV, it still probably won't work, because digital cable is so different.
With the optical cable plugged into the cable box, and the cable box is on, do you see a red light in the other end of the optical cable? If not, the optical cable is probably broken, and you'll need a new one. Optical cables have glass or plastic fibers running through it, and are very easy to break.
Most digital cable boxes have a digital coax output too. They are color coded as orange or black. If your receiver has a digital coax input (most have at least one), color coded the same, maybe try that one, instead of optical. You should be able to use a yellow composite video cable, to try this. If it works better, I'd get a better cable than the yellow one, for permanent use.
Good luck!