My new sound setup confusion

[Blu-Curry]

This whole time i believed my receiver was NOT capable of DTS, but after actually looking at the manual (and on the receiver) it IS! So i decided to look at my connections to see what was wrong.

It just maybe the setup onscreen options, but i'll have to check that out later as my bulb in my tv still needs to be replaced.

1. Optical cord going from the the tv to the receiver.
2. Optical cord going from the PS3 to the receiver.
3. RCA jack type cord going from MTS box to receiver.

I looked at the receiver screen when i want to access my PS3, and it selects option 1 above and not 2. So is this related to why Dolby Digital works, but DTS does not?