--local-only works indeed like you suggest and uses the local Docker daemon
The docs say the opposite, or at least it is a bit unclear IMO
If you have Docker running locally, it builds it on your machine. If you don’t have Docker running locally, it builds it on a Fly build machine. Once your container is built, it’s deployed!
Just popped in to say that I experienced the same as the original poster. I’d recommend you update the documentation to be more clear that this is not out of the ordinary. I read the instructions at Deploy via Dockerfile · Fly Docs and understood the quoted section above to mean that if I have a working Docker installation, remote builds would happen, and I then hit up Google to try and work out what was broken when remote was selected despite a functioning Docker build environment locally.