If they sent you a template as a .doc, .dot or ..dotx, docx etc. (Word 2007)
then you should be able to open it and select your data source. You
shouldn't really need to go into the Label Options dialog unless you are
forced to by saying it's a label merge (which you may not have to do).

Otherwise, what you need to do in the Label Options dialog box is
a. click New Label
b. enter all the layout information requested in there, and give the new
label type a name. (At this point you may realise that you haven't the
faintest what all the measurements should be, but my guess is that you will
find them /somewhere/ on the packaging or the Avery site).
c. after that, your layout should be listed under Label vendors:
Other/Custom