In the top right corner of the album backend list view, you can spot a button to manage the watermarks. You can create the watermarks there, which will be applied to the album photos in the frontend.
The first thing to configure for a watermark is its internal name, which will be used only in the backend. Then, you can define different watermark image and its position for both main and thumbnail images. It is recommended to use a transparent image for a watermark.
Once you have created the watermarks, you can assign them in the frontend module settings.