Could you show/share your seed config? I think you just miss a option before this setting which is required for expanding the other options resp. there is a difference between the to tags you show here.
And there is a difference between: CONFIG_TARGET_OPTIMIZATION
and CONFIG_DEFAULT_TARGET_OPTIMIZATION
They can differ it does not hurt. Because the latter is the default if nothing else is set. So what is CONFIG_TARGET_OPTIMIZATION
showing after expanding the config?
Yes, you usually do not overwrite the CONFIG_DEFAULT's resp. it is not necessary. I don't know how the exact meachnism here is. But it should work like an overwrite resp. an addition. On gcc you can pass like -Os -O2 and gcc is picking up the 2nd -O.
EDIT: You can verify if gcc is picking it up compiling with V=sc.