Click on it and YouTube tags are put into your post. Put the video ID (not the full url) of a YouTube video between the tags and code is placed around the ID to embed the video.
Here is the URL for a video http://www.youtube.com/watch?v=4mCKLt7A6sA
part of the URL is the video ID that you place between the YouTube tags to embed the video. If you put the whole URL there, it will not work and will display nothing.