I've actually made this pattern before -- it's quite lovely.
Yes, that is the hole you make where later you will pick up stitches and knit the thumb. You just do exactly what it says. Without attaching (that is, tying on), use a different piece of yarn to knit those seven stitches. Then slip the stitche worked in the waste yarn back onto the left needle, and knit with your working yarn (the original yarn) those seven stitches again. You essentially have an extra row of seven stitches in there that should be in a different color yarn. Later you'll take the waste yarn out, revealing the live stitches where it had been worked through.