The problem is that the I key repositions the cursor to the In point, but then pressing the O has no effect. Having experimented, the only way I can do it is to stop playback after setting the In point, then restarting from there. Then the O key works as advertised, and I can then either drag to the Timeline, or make a sub-clip. As I understand it, pressing I followed by O should make a selection during playback.
Further, using the I and O keys to select part of a clip on the time line has no effect whatsoever.