The bottom drawing with the cast on sitches going over the back neck is what you want. I wondered if like me you needed to see that. If you have the CO stitches there, they will span the back neck and you will then start knitting on the held stitches where the arrow is. At that point you should have one row of knitting with a gap at the back neck. I assume that you will be instructed to stitch the edges together later to close the gap and attach the hood to the back neck. I think you've got it.
These concepts can be so hard to get but once you do you'll have a much easier time with future projects. Good for you for not giving up!
Happiness is catching that dropped stitch while it's still fixable..