No this option's purpose is to link to an SDK CMake file that handles compiling with the ARM toolchain.
I've actually found the solution, with some help from this post: Symlinks to ARM toolchain binaries
When you install the Playdate SDK it also installs a bunch of symlinks to it's own ARM Toolchain in /usr/local/bin
All I did was run the command
ln -sf /Applications/ARMGNUToolchain/13.2.Rel1/arm-none-eabi/bin/* /usr/local/bin
This replaced the SDK's toolchain symlinks with the new ones and it compiled and ran on playdate fine