Here is the example taken from Ross' Elementary Analysis ((*) refers to the $\epsilon$-$\delta$ definition of continuity):

Usually it is possible to know what to value to bound $|x-x_0|$ by (usually a natural number). Where is the intuition to let $|x-x_0|$ be bounded by $\frac{x_0}{2}$? Furthermore in the line that starts with "If $|x-x_0|$...", I'm not sure how $|x-x_0|<\frac{x_0}{2}$ leads to the remainder of the sentence aside from $|x|<|x_0|+\frac{x_0}{2}=|x|<\frac{3x_0}{2}$. Any explanations are appreciated.
You do not want $|x-x_0| \ge x_0$ as that could allow $x \le 0$.
Nor would you want $x$ arbitrarily small and positive, as that would allow $\frac{1}{x^2}-\frac{1}{x_0^2}$ to be arbitrarily big.
You can avoid both of these by restricting $|x-x_0|$ to be some fraction of $x_0$, even before considering $\epsilon$.
$\dfrac{x_0}{2}$ is the simplest such fraction.