I don't think you are missing anything. but simply the login page cannot be displayed in a frame.
I don't know much on this topic, but I found this: "Due to the popularity of clickjacking on the internet, it is common to prevent login pages from being display inside frames. The X-FRAME-Options meta tag in HTML makes it easy for providers to implement this safeguard on a widespread or domain/origin-specific basis."
Yes, you're right, that's why the login page was needed in the first place. Disabling the option to "Require an Office 365 account from my org to book" is not going to redirect to the login page anymore.