How do the aiming options work?

There are now three aiming modes to toy with: assisted aiming, traditional GTA, and free aim. "Assisted aiming gives players a larger targeting area as well as a little more help analyzing targets to try and pick the largest threat," Hooker described to Game Informer. "Traditional GTA is the closest to previous GTA's soft lock option. It shares all the characteristics of assisted aiming, with the additional ability to flick left and right between targets using the right stick."

Source

I'm pretty sure (but I haven't played V yet) that each time you press the trigger to aim it attempts to lock onto the closest target to your crosshair. If you want another lock (as in other Rockstar titles like Red Dead/Max Payne 3/GTA IV and numerous other games) release the trigger and re-press it.

They probably do this to allow some sort of manual control over aiming once you've locked on whilst maintaining the feeling of control you get from free-aiming.

Auto-aim I'd imagine is just auto-lock on, fire and forget (if you are letting your 3 year old play GTA V this is the one for you - just keep them out of the strip bars!)