I figured it out.
For anyone else in the same situation:
You need to run Steam in VR mode. I thought I was because I was selecting the VR mode option when opening ED from Steam but that doesn't do it.
You need to force your Steam into VR mode, to do this go to the properties of your Steam shortcut and on the "Target" put "-vrforce" at the end of the target without the quotes.
This will enable an option in steam under the View menu for "Start SteamVR". When you first select this it will download what it needs for SteamVR.
After this is downloaded and enabled you will be prompted to set up your space for VR. It takes you through some steps to set the location of your headset. You will need to have a tape measure for this.
When this is done and you are in SteamVR mode down the bottom of your Library games list there will be a section for SteamVR games. Select Elite Dangerous from this section and click Play, you should now have the HMD options in the Graphics settings in ED and the DK2 should work.
I did this with version 0.8 of the Oculus runtime. I believe you need to be running this version but I have not tested with earlier versions.
For anyone else in the same situation:
You need to run Steam in VR mode. I thought I was because I was selecting the VR mode option when opening ED from Steam but that doesn't do it.
You need to force your Steam into VR mode, to do this go to the properties of your Steam shortcut and on the "Target" put "-vrforce" at the end of the target without the quotes.
This will enable an option in steam under the View menu for "Start SteamVR". When you first select this it will download what it needs for SteamVR.
After this is downloaded and enabled you will be prompted to set up your space for VR. It takes you through some steps to set the location of your headset. You will need to have a tape measure for this.
When this is done and you are in SteamVR mode down the bottom of your Library games list there will be a section for SteamVR games. Select Elite Dangerous from this section and click Play, you should now have the HMD options in the Graphics settings in ED and the DK2 should work.
I did this with version 0.8 of the Oculus runtime. I believe you need to be running this version but I have not tested with earlier versions.