The Lava Orb is an item obtained by completing the "Kill the Lava Dragon inside the Lava Biome" Chrono quest. It is used to craft the lava sword and lava spear, which are the most powerful melee weapons in the game.
The Lava Dragon is currently the 2nd strongest mob in the game. So, trapping them is a much better way to kill them. However, be careful: wooden/stone walls are not enough to hold back the dragon, as the Lava Dragon can quickly break buildings around it. You should use a higher tier, such as gold or diamond. Also, don't use spike walls, because they do not do damage to Lava Dragons, and they have less health than normal walls.
To actually use this item, you need to get the dragon sword/spear, which requires the Blue Orb. To get the blue orb, you have to get a dragon heart in 6 days. Therefore, you must first go into the winter, stock up on ice cubes, kill a dragon (by 6 days), acquire diamond or amethyst tools, travel to the lava biome, and kill the lava dragon (by 10 days) in order to get both the Blue Orb and the Lava Orb. Then, you must kill 2 more dragons and 1 more lava dragon, gather lots of amethyst and reidite, craft the dragon sword/spear, and then craft the lava sword/spear.
The lava orb was added in the "Time Is Running Out!" update.