You're quite right that my first instinct is to reject the premise, because "muscular" Neutrality reads pretty straightforwardly as schizophrenic. "We want there to be a balance between altruism and sadism!" is...a tough sell, to say the least.
Unfortunately, even if I take as an unpleasant given the idea that this
has to be true, and thus must puzzle out why, a lot of the answers are...not great. You've covered several of these, but I'm going to retrace just to make sure I don't miss anything.
- Good (and possibly Evil too) is either too stupid or too difficult to educate on the necessities of existence, and thus will do Something Bad thinking it's the desirable thing to do, which would doom everyone. This has a double-barrelled problem: it first paints sincerely good people as either morons or so stubborn as to be functionally un-educatable, which is...not a good look; and second, it presents the idea that having too many people who sincerely care about other people is literally dangerous to reality itself, which is a damn hard sell.
- Good isn't really "Good," but rather more Righteousness, which can be actually good or bad; and likewise Evil isn't really "Evil" but more like...Indulgence, which can be good or bad. This then presents the "muscular" Neutrals as the only ones capable of balancing the two and achieving full self-actualization. This, of course, has the serious problem that it basically dodges the issue, by pretending that "Good" actually means something other than, y'know, Good. It's the weasel's way out, playing word games.
- There is something Good can do, if it gets powerful enough, which the Neutrals disapprove of. Perhaps people would lose free will (though that kinda turns the conflict into Law vs Chaos, another dodge!), or would cease growing and developing, or...etc. This is like the previous, but it delays one's ability to see the argumentation bait-and-switch by having the label "Good" really mean Good at first, only to mean something else later once "Good" reveals its true nature. Alternatively, it results in the "muscular" Neutrals looking like huge dicks, because they want to reap the benefits of Good succeeding, but don't want to lose the benefits of Evil succeeding in the process.
- Good and Evil, if not equally thwarted, could escalate their conflict into the total destruction of reality. Under this scenario, the Neutrals prioritize continued existence over any other goals, while Good and Evil prioritize their philosophical commitments over all other goals. This verges into something like the first, where Good is apparently led by beings who think total cessation of existence is a worthy price for achieving...something? Like the previous it's a bit more sophisticated about it, but ultimately still kinda cashes out as both Good and Evil being too stupid to not end existence.
- There's something the Neutrals want, which would be disrupted if either Good or Evil "won"--so the conflict must endure. This is probably the first one that doesn't paint at least one side in pretty bad terms...but it still leaves the Neutrals looking Very Not Great, since they're actively prolonging and encouraging suffering in order to further their own goals, which looks like a pretty classic Evil motive. However, if their efforts tend to be measured and precise, rather than wanton flip-flopping without explanation, then there could be some goal or goals that aren't horrible. (Consider, for example, Q from Star Trek; he could be a "muscular" Neutral force seeking entertainment, and thus preventing any side from winning because that would bore him, but heroic last stands that succeed or dramatic falls that ruin empires would be popcorn-worthy.)
That's about all I can come up with off the top of my head.
Reflecting back on these, I can actually see one possible explanation for it...but it really does end up painting both Good and Evil as mindless automata incapable of breaking out and seeing the higher, truer,
real conflict: "Reality" for these characters actually exists to
solve the question of whether Good or Evil is mightier. As soon as the question is answered, reality ends--the program spits out an output and terminates. Not to overly reference Star Trek here, but think of the sorts of things the Excalbians did (the ones from the Original Series who made copies of figures representing "Good" and "Evil" as the Enterprise crew understood those concepts. (Hence why Kahless was "Evil" here, even though later Trek paints him as a pretty much purely heroic figure.)
By these lights, the Powers That Be of both Good and Evil will never be convinced to lay down their arms (as those are the program itself ensuring that the conflict happens), and anyone interested more in self-preservation than in "proving" the rightness of their position necessarily becomes a "muscular" Neutral. The vast majority of people will pretty reasonably treat the "muscular" Neutral position with skepticism or even disdain, because reality feels real; more or less, G.E. Moore's answer to the problem of solipsism, namely that it is genuinely possible to believe that the skeptic's position of skepticism is less believable than the idea that your hand is your hand. Anyone seriously Good would see it as a dodge to get away with doing some Evil things sometimes. Anyone seriously Evil would likely see it as either false pretenses, trying to have your cake and eat it too, or as a convenient excuse for constantly shifting loyalties.
Of course, the price paid for this relatively successful implementation is that you've just openly admitted that your world is virtual, false, hollow--a very dangerous admission for any fictional setting--and pretty much conclusively made the "muscular Neutral" faction the factually
correct one, with both of the other two being made of either deluded fools or preprogrammed automatons.
Given the restrictions of the premise--"Good" must really mean Good, "Evil" must really mean Evil, and the Neutrals must have a genuine
reason for their seeming waffling--I'm not really sure it's possible to come out the other side.
Something has to give. The above weakens the first two premises by ultimately removing the moral agency of the people involved in order to give the Neutrals a good reason for not joining up with one or the other.
The only other option I've ever seen that could potentially do this still breaks the premises, by
splitting "Good" into Love and Valor. Love+Valor is more or less Good as we usually think of it, heroism and bravery and altruism and kindness. Valor and Evil is both the tyranny of the Galactic Empire in Star Wars, and the hideous thrill-seeking of a serial killer daring the police to try to catch them. Love and Evil is the obsessive-possessive, the gilded cage, the cradle-to-grave nanny state, and the robots who rise up to "protect humanity from itself". (I can't recall what short story I read this idea in originally, but it was a pretty interesting one, about how humanity got conclusive proof that aliens exist...and it was kind of a letdown because all we learned was their three-pole philosophy, because they never advanced beyond developing radio, preferring to do art and philosophy instead.)
By these lights, "muscular" Neutrals are the ones holding Valor. "Good" becomes Love; if Love grows too mighty, it
absorbs Evil into itself, and becomes something horrible in the doing. But if Valor sides too much with Evil, it too becomes something horrible--so Valor only sides with Evil just enough to keep Evil
alive but never
powerful.