just to make it clear, the white plastic lever is another fuel shut-off, like the petcock on the tank. the lever points in the direction of flow. so if you thought it was a choke, you were basically limiting the amount of fuel getting to the carb.
as for the metal choke lever, it's only used for cold starting. when it's up all the way, it blocks air from sucking into the carb throat, which gives more gas to the motor, making it start easier.
i usually have the lever up all the way when my engine is fully cold to start it. within about a block, it'll start to sputter a bit, and i'll put the lever all the way down(choke off) and forget about it.
your surging problem could be the result of too much oil. do like Joe said and drain it out.
it also could be that the choke lever (the metal one, remember?
) is loose and is bouncing up when you ride.
they loosen up from vibration or whatever and flop around sometimes. the lever should have resistance to it, and it should stay in whatever position you put it in.
that's a pretty common problem. just take the air filter off the carb and tighten up the little nut. it happens to me every other month or so, and freaks me out when my bike suddenly dies.