Bill Houghton, Sebastopol, CA
Yes, that's for holding nails, to start them in awkward places, like over your head where you can't reach up with both hands or in a tight spot where both hands won't fit. You put the nail in place between the two spring-loaded ball bearings and facing straight back, head in the T-shaped part of the slot, then drive it hard enough to stay in place when you pull the hammer straight down; then you can spin the hammer around and drive the nail home. This is one of several designs - I've seen designs that use magnets in place of the ball bearings yours has.
You need, of course, a nail at least long enough to reach past the claws - 6d or 8d, maybe.
The hammer in my carpenter's toolbelt is of that design (mine's German - I'm not sure who all made them). I've yet to use it, but it's nice knowing it's there.