Image quality. You have the choice between two of the major file formats: JPEG and PNG. Both are well established among browsers. JPEG has a good compression ratio, but can result in visible artifacts. PNG's compression algorithm is not as good as JPEG's, but there are comparatively fewer visible artifacts; nonetheless, older browsers might not recognize this format.
Choosing between one or the other is often a matter of taste. That being said, JPEG remains the recommended choice. If you would rather prevent information loss because of a format change, choose the second option, "Use PNG only if the base image is in PNG format".
PNG format is not compatible with the "Watermark" module.
- JPEG quality. Do not choose anything below 80 or at worst 75, for fear of visible compression artifacts.
- PNG quality. Do not choose anything below 7 over 6 or at worst 67, for fear of visible compression artifacts.