You can either select an image that has already been uploaded to the site or upload a new one.
To upload a new image: click "Upload files" right below "Featured image", then "Select files". Select the image from your computer and click "Open". The image will upload.
To select a an existing image or select one that you have just uploaded, click on the image (a blue checkmark will display), and click "Set featured image" in the bottom right corner.