Well it seems that they chose not to add the same option to the iPhone version of iOS 9.0.2. Not sure why. So iPhones still have wonky, zooming custom wallpaper.

On the iPad it seems you need at least a 2048 x 2048 px image to make it work, but even then it is a bit flaky. If you pinch and zoom the image while setting it as the wallpaper, then the option does not work. If you leave it as displayed when chosen, then it does.