Yes, it looks as though you figured out how the makers of Mylio set up the “organize folders” feature. I was also stumped by this feature and posted my concerns on this website.
Mylio organizes only the folder of images that is selected, but it places them under the default “Mylio Pictures” main folder UNLESS you use the custom feature to place them in another folder under that same directory.
You summarized it nicely when you said “The photos to reorganize should be all the photos in the single folder that is selected (and its nested folders, if any). The obvious place to put the newly organized photos is inside that selected folder.”
I agree, it should organize your photos inside that directed folder by default (or at least have an option for it) instead of assuming you want all of them under the “Mylio Pictures” folder.
I’m doing a similar thing that you are by keeping certain photos separate from others (my hobby pics versus my usual social pics) but also do this by selecting the custom feature and then type in the folder I want them all before the year / month option and then it organizes them the way I want.
I believe I had also revealed another “bug” or confusion with Mylio when I thought I’d save Mylio a little sorting time by selecting just the pictures of the folder-within-a-folder that I wanted reorganized and Mylio proceeded to resort ALL of my pictures again from all sources in to the Mylio Pictures default directory tree.