You are correct. The last function argument is the one that denotes whether it should be watermarked or not.
I just think watermarks in the thumbnails are not aesthetically pleasing. You can only specify one size watermark, and it doesn't get scaled to the image size on which it is being applied. So if you make a 32x32 pixel watermark to combat HUGE watermarking of thumbs (in this case the heading), the watermark in the actual image will be tiny.
I released a change that adds an option to ef+ so you can have it either way.
"thumbnails" don't get watermarked. The parameter on custom image was made to let the them say whether the image was being used as a "thumbnail" or as a regular image (e.g. in stopdesign.)