You can limit a Smart Playlist to a certain number of songs, or can leave it unlimited. Choose that in the first section.
If you check “Match only checked items” then items in iTunes that are not checked (as seen in the checkbox to the left of each song in your iTunes library) will not be included in the Smart Playlist.
Enable Live Updating is you want the Smart Playlist to be automatically updated every time a change is made to iTunes that makes your Smart Playlist rule.
Once you’ve made your selections, click “OK.”