The upgrade/update option would be for scenarios where there is already an operating system installed. Provided that the recovery attempts previously did not wipe the operating system, there should be a copy of Windows remaining for the upgrade/update option to work. Personally, I prefer the custom option to perform a clean install of Windows 7. This site has more information regarding the various installation methods for Windows 7. This detailed guide covers how to perform a clean install should you choose that path.