Yes, that is the option you need, assuming you want to host the domain here, but keep the registration at Godaddy.
After your account has been approved, you will need to use the Godaddy configuration utility for your domain to set the name servers to;
Once the new DNS information has propagated around the Internet, this can take a few days, your domain should be up and running.
As for your 'free' domain registration; If you do not use this during the sign-up process, you will be given a 'domain credit', this will allow you to register a domain later for a price of $0.00. Also, every 12 months, just before your plan anniversary, you will be given another 'domain credit', you can use this to renew an existing domain registration, or register a new one.
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