Answer for your Question **"how the state options work in Magento 2"**

In many countries, the state, province, or region is a required part of a postal address. The information is used for shipping and billing information, to calculate tax rates, and so on. For countries where the state is not required, the field can be omitted entirely from the address, or included as an optional field.

Reference Magento User Guide

> https://docs.magento.com/m2/2.1/ce/user_guide/stores/state-options.html


[![enter image description here][1]][1]

**Allow to Choose State if It is Optional for Country**

For countries where it is not required, determines if the Region/State field is included in the postal address of the customer. Options:

> If Yes Includes the Region/State field in the customer address, even
> if not required by the country.
> 
> If No Omits the Region/State field from the customer address if not
> required by the country.


I hope this will help


  [1]: https://i.sstatic.net/bi6Z0.png