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That options is for categories in edit categories and that is where the admin password protects a category.
If you allow personal albums users can hit MY ALBUMS on the photopost menubar and in there they can create or edit their personal albums and on creation or editing there will be a box that asks whether it will be private or not. If they set that to yes it will be password protected.
I hope that explains the functionality of the software to you. If there is anything else let me know.
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