The index is a rate which is set by the market and published by a third party. Various ARM indexes include LIBOR, MAT, COFI and CMT.
Indexes can be based on rate averages or spot rates. The benefit of rate averages is that the fluctuations in your monthly rate will move more slowly. The margin is typically higher on rate averages, which means your overall payment could be higher than with spot rates where fluctuations are more abrupt.