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Does the "Move the contents of [FolderName] to the new location." option only apply to files found in the users profile, or does it also apply when changing the destination of the redirection to a new share?

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It would apply in both situations. More specifically, this option should apply in any case where the current location doesn't match the location specified in the policy.

On a side note, if you've never used folder redirection, proceed carefully. From past experience, it rarely works perfectly. You run into permissions issues, users with huge folders that take forever to copy, etc. Examining the number of FR-specific hotfixes for any given Microsoft OS should give you a good idea. I'd strongly recommend testing any FR policies on a small group of users, whose profiles you've backed up first, before deploying it en mass. Also, definitely watch out for this particularly nasty FR bug that can occur when you use the "move contents" option.

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