That type of point snapping (to Show pts) is actually a separate thing - it's available all the time and doesn't depend on the "Snap to picked points" setting.

The "Snap to picked points" option only controls whether points that you have just clicked within a single draw command are available for snapping, while still within that same draw command.

The example is - do a Draw curve / Freeform / Control points.

Pick a few points and don't finish yet - right now while you are still inside that draw command if you move your mouse to some of the previous points, it won't normally snap there. But it will if you turn on this one "Snap to picked points" setting.

Why would you want to snap back to earlier points you clicked? Well, it's not often that you do, that's why it is pretty obscure - the only reason you might want to do it is to draw a construction line off of one of those points, because you want to use the construction line to align some next point off of one of the previous ones. And even then it is easy to accomplish the same thing by setting up some points or lines as snapping guides before you draw the curve.

- Michael