Stock location for the dash gauge temp sensor is in the drivers side head where you found it, and it should be a green wire. It all looks correct. Some older iron heads had a 3/8” tapped hole, but newer 350 engines are usually 1/2”. My aftermarket aluminum heads have a 3/8” hole.
There is an identical tapped hole in the passenger side head and it works fine for a temp sensor. Its farther away from the thermostat, so it might be a little different temp than the other head, but that is usually not critical.
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I am using a 195 degree high flow thermostat (Robert Shaw, IIRC) and it works very well to keep the engine at about 190-195. It already has a drilled bypass hole, and it’s designed to provide a larger opening to help flow. I am also using a high flow cast iron water pump.