This option specifies the output folder for one-touch and sound-activated recording. It's only applicable when the record activation type is "One-touch" or "Sound". In both of these cases, the filename is generated automatically from the current date and time. If the activation type is "Prompt", the output folder and filename are specified via the "Save Recording As" dialog, so this option doesn't apply.
The folder path can be browsed for, or entered in the edit control. A relative path is permitted, but its interpretation depends on whether you're using the portable or installed version of WaveShop. In the portable version, it's relative to the application (i.e. the folder containing WaveShop.exe), whereas in the installed version, it's relative to the Application Data folder within the current user's profile.