The menu in Archive Manager has an item "New Archive". When you choose it, you get to write the name of a new archive. You can also supply a password! But the archive is not created and you are not asked which files to put in it... So why does Archive Manager have a menu item "New Archive" when it has no function?
In Files you can select a bunch of files and on the right-click menu there is an option to copy them into a new archive. But you cannot give the archive a password!
So how do I create a password protected archive?
It has a function. After filling the dialog, you get a new empty Archive Manager window, ready to add files to. The archive will be written only once you add files, either by dragging from the file manager or by using the + button.
Indeed, you cannot create a password protected archive from right-clicking selected files in nautilus. To create a password protected archive, you need the "New Archive" dialog. Under "Other options", you can enter a password if the archive type you create supports that.
When Archive Manager is open, the dialog will be displayed as soon as you add files. If an archive is open, you can use the menu item "New Archive" to create a new archive with a password.