You under watermark options set this to yes and put the full server path to the watermark image.
you then in edit categories edit all your categories and set the watermark permissions of which usergroups gets their images watermarked.
remember when putting the watermark path and doing your watermark if your using GD your watermark needs to be a png. If your using Imagemagick you want to use a gif image
Thats all their should be to it.