You mean, ps4 optical to X7, Dolby light is on? Then yes, I use SBX all the time, though I customized settings to my taste. SBX is what will convert Dolby 5.1 (or 7.1) into headphone surround. Turn SBX on, and from the smartphone app tell the X7 to turn off all effects except for the Surround slider in SBX. Then, play with the slider to find how you like it... I suggest starting gameplay with surround at 100%, then after a few minutes turn it down to 50% to hear the difference, then play with the slider to suit your preferences. After you get used to that, you can optionally turn on other effects, though personally I never got along well with Crystalizer.
You mean digital output FROM THE PS4... Inseconds99 meant PS4->X7->Headphones, not PS4->X7->some other external optical DAC->separate amp->headphones.
The X7's optical or line-outs only output speaker-virtual surround (which I haven't tested much with speakers), which is what you described, but the X7's headphone out jacks will do "real" headphone surround processing from the Dolby home theater mix.