If you are referring to the clutch lever on the winch proper (not the PTO lever on the cab floor), it should move 3" or so.
If the drum is turning, the plunger lock is disengaging but you still might want to take a 3/4" wrench and pull whole the lock assembly out of the side of the gearbox and clean and grease it. It doesn't have a seal and most of them are rusty and sticky. If you pack it with grease from the inside, it plugs off one more place for water to get into the winch. Where is sits it won't get lubed unless you take it out once in a while and hand lube it.
As far as the PTO lever on the floor, it will travel a lot further going to the forward position to wind in than it will going to the rear position to wind out. There is very little lever travel from PTO neutral to PTO reverse (where it winds out under load) Make sure you close the lever lock door each time you put the lever in neutral. It's cheap insurance to prevent letting the clutch out while inadvertently having the PTO engaged.
Before going too far I suggest removing the six cap screws that hold the brake cover on the front of the drive shaft side worm gear housing and check the brake to make sure it's not corroded onto or hanging up on the brake drum. The adjusting screw is the 9/16" cap screw under the brake housing. Sometimes you need to loosen it quite a bit to get the crud out from under the brake band. You may need to use a drift punch on the end of the band to free it up.
Usually, the lever will engage easier if the drum is rotated by hand while trying to engage it.
I've worked on a few that needed rapping with a 3 pound hammer (rap, not thump) while slowly rotating the drum to get them to engage the first time or two. There are only two keys on the shaft for the clutch to engage with so be prepared to rotate the drum by hand, up to 180 degrees, to get the clutch to engage.
If you haven't already, drain the two winch housings and put fresh 80/90 wt in it. I usually flush them with dry cleaning solvent, acetone or MEK and let them dry out before refilling them. When the solvent evaporates it carries away any moisture that was in the housing.
Where the clutch slides on the drum shaft is above the level of the lube. It won't get any lube until the winch is run under power long enough for it to work around the gear box. You may want to over fill that side so the lube is above the shaft, work the winch for a few minutes and drain off the excess oil. That will lube it and can free it up a lot quicker.
There is a friction brake that is intended to stop the drum from free wheeling and causing a "bird's nest" backlash. It rubs on the outside of the drum on the clutch side. It adjusts with a big screw slot at the lower front edge of the clutch side gear box. It's a pain to get to but should provide just enough resistance to stop the drum from free wheeling when you stop pulling out on the cable. I've got some socket attachments with big straight slot screwdriver tips that make the friction brake adjustment easy. It's an awkward bugger to get a big enough screwdriver on, otherwise.
Both brakes drag all the time so they need periodic adjustment. The procedure is in the -10 TM.
Lance
dburt brings up a good point. The ball detent has a pretty stout spring and can rust up in it's bore. If you look down on the lever you'll see the shaft the lever clamps on. There is a bump to the side of that which houses the ball and spring. Soak it with penetration oil or PB Blaster every now and then. If it freezes up, it's strong enough to keep the lever from engaging.