Jim, the short answer is it should be set at which ever position (o IRE or 7 IRE ?) allows you to correctly get that contrast and brightness on a DVD setup disc like AVIA. For example, on the test pattern that has the 2 bars moving from side to side, you want the left bar to be gone while you can still barely see the right bar. If you don't have a calibration setup disc get one and you will see. If you cannot get that pattern to look as described above (you always see both vertical bars), switch the DVD players black level to the OTHER position.
Many factors can effect which one should be used. Which DVD player you use, what display you are using, which connection you are using etc.
Those answers are correct (which really pleasantly surprises me!).
You also may discover that you can calibrate things to look correctly with your DVD player set in either position, in which case it doesn't matter which setting you use.
As for that this option does, it defines the voltage at which black is output. Black is either output at an American NTSC standard of about 54mV (7.5IRE), or it can be output at 0mV (0IRE).
In either case, this voltage should be displayed as BLACK by the display, if the adjustment range is sufficient onthe display to accomodate this voltage. IF not, as described by charles, you should use the option that allows you to properly display black as BLACK, without clipping shadow details.
Actually, I would add that THX optimizer is a temporary solution, as the values of those patterns vary slightly from disc to disc. Avia or DVE are preferred for a proper reference, but optimode should get you very close at least.