Most of the options here are self-explanatory, but a few points need clarifying.
Backup original file
renames the original file in the WC to filename.bak
before saving the modified version.
Default to UTF-8 encoding when set, ANSI files are loaded as UTF-8 encoded and saved as such when edited.
Max line length for inline diffs TortoiseMerge can get slow when showing inline diffs for very long lines. Because of that only lines that are shorter than 3000 chars are shown with inline diffs. You can change this value here.
Ignore line endings hides changes which are due solely to difference in line-end style.
Ignore case changes hides changes which are due solely to case changes within the text. This can be useful with apps such as Visual Basic, which changes case in variables without warning.
This dialog allows you to select the background color coding used to highlight the different line changes.