About Wikilinks:
They are just internal links, which means links inside your Obsidian vault. The full syntax is [[Linktarget | Displaytext]], “Displaytext is optional” therefore the short form is [[Linktarget]] which is as well used as “Displaytext”.
About Markdownlinks:
They are internal ==or== external, “external” means the “Linktarget” is outside of your Obsidian vault. The syntax is [Displaytext](Linktarget).
You can use both kinds of links and I do that - for internal links I use Wikilinks and for external links I use Markdownlinks, which isn’t surprising because there is no choice 
You could also mix your internal links, some as Wikilinks and others as Markdownlinks, but that wouldn’t make any sense.
The option “Use [[Wikilink]]” is so far totally irrelevant. And that’s fine, because I wouldn’t be amused if the program - whenever, wherever, whatever for - would change my (internal) Wikilinks into internal Markdownlinks.
But now there is this option which says: In some cases I want to force this in other cases that. And that’s fine too, because - maybe - in some cases I want this and in other cases I want that 
But on the other hand I don’t want any change of my Wikilinks. And there it gets a little bit tricky and I guess the developers paid for this option with some headache
The keyword in the option “Use [[Wikilink]]” is “generate”. If you create or change a link manually, the option will have no effect, if you do that by drag&drop or by choosing the target from a popup-window the program will do it and generate the link, which means the option will have affect.
The headache still begins with the term “generate”, because in the proper sense it means just create and not “change”. But the behaviour is create or change.
[[fileA]] - fileA does exist
You type the link manually → nothing happens
You choose it from the popup-window → you get [fileA](fileA.md)
[[fileB]] - fileB does not exist
You type the link manually → nothing happens
What did you do? You created a link manually. The link target is missing but the link is there.
You click it and fileB is created but the link hasn’t changed and therefore it’s still a Wikilink.
That is technically not quite true, we can’t see a change but the link changed.
I show it with an html-link as an example
before <a href="">fileB</a> a dead link with an empty link target
after <a href="fileB.md">fileB</a>
Another example, if you change the location of “fileB” there is no visible change but the program automaticly changed the link target and therefore the link should switch to a markdown link, but it doesn’t. And that’s fine, because you would loose control with such an automatism.
As a rule of thumb you can say, if you do it manually nothing happens, if it is done by the program and there is no visible change nothing happens.
But you can avoid headache, if you use Wikilinks for internal links and Markuplinks for external links, then neither you nor the program has any chance to make something wrong
For this you have to activate the option “Use [[Wikilink]]”.