This is called Gear Three in the VIZ manga, and Third Gear in the Funimation sub and dub. Used with his already-strong physiology, this apparently gives his arm more mass and a larger area to attack with far greater strength, but he sacrifices mobility for this strength, as his limbs are now so large that Luffy has trouble moving. Luffy blows so much air into his body that when they are all focused on a single limb, they become the size equivalent to (or greater than) that of a giant's, if anything resembling Oars' size. He is then able to transfer the air through his entire body, requiring the torso to act as an interface for his various limbs.
Luffy corks his mouth with his thumb, bites into his thumb joint (making a small opening) and blows hard into his bones, which inflates his arm.
