The reason for this is because the posts that are being loaded by the content template as an example to view the template with don't have any featured images in them.
What you can do is for one of the pages that show up in the list at view with: in the top of the screen, set a featured image for that post temporarily and then you should be able to select a featured image in the content template.
Thanks, that works but this seems to me like a bug. Why is it that only a few posts are shown in the dropdown and wouldn't it be better to allow the featured image option even where he example post chosen doesn't have one, but perhaps with a message "this post doesn't have a featured image"?