The only way to do this is to make images which are the right size and add them using custom fields:
- Edit the post to add the image to
- Add a custom field called "slider"
- Use the path to an image for the custom field value. This can be one in your media library or use an absolute path from another site if you have permission to do so.
Background image resizing using CSS3 isn't particularly well supported yet, and it gets pretty complex to create something which could theoretically be any size but which can handle different image sizes. I've tried to make it so that you've got that extra little bit of flexibility in that you can use attachments automatically (which might give you nice, if a little offset, images) or add your own.
You're not doing anything wrong with the Cycle Options, it's just that the way this is written (using the image you set as a background) "Fit" won't make any real difference.
I'll take a look at making this a bit more intuitive in the next version, which will address some of the layout and styling questions I've been having.
Thanks for using the plugin!