To anser your questions.

arms fully up should contact the main body.

You have plenty of movement in the arms, you are right ,you don't want the servos to hit each other. this much arm mpovement will make him spin very fast one way or the other on descent.

The release pin should stick out of the body the maximum amount you can get and still have it retract just below the surface of the main body. How far it sticks out isn't that critical, you just want it to fully retract.

And to answer Porsche968 question, we drop them from a radio controlled plane.