I'm struggling with basic options in a category menu item. I can't change the image size no matter what size i select. Is there something i'm missing? Ideally i wanted a 2blockGrid result for those menu items but this template is only available for modules. Is there any way to have this sub template for the category menu items as well?

Make sure that the category you are editing is not inheriting is not inheriting its settings from another category.

Now, yes a 2 block grid is doable with some tweaks.
After you have edited your category's settings you need to add a float: left to the itemContainer class.

You can also use a Page Class for that menu item to differentiate you styles a bit.
This will come in handy (paste it in your custom.css).