The Blog Categories component displays all categories that include at least one blog post. When a visitor clicks on a category name it will take to a page listing all blog posts in that category. If you create a category but do not assign it to any posts, it will not appear in the Blog Categories page component.
The Blog Categories component can only be added while editing blog components on the blog page template.
There are no options for the Blog Categories component. Simply add it, publish, and you're done.