"What is your occupation?" is the normal understanding of the question in US English.

It means: what is it that you do? The strange thing here is that you have two times 'do', but their meaning and use is different. English is quite silly sometimes. Especially with this 'do' verb. What do you 'something', means something like: What is it that you 'something'. Example: 'What do you write?', means 'What is it that you write?'. Is it a letter, is it an email? The second 'do' in your sentence then has the 'real' meaning of 'do'. It is not used as some grammatical constructor but as a verb to describe an activity. So it means: What is it what you are doing? Are you walking? Are you sitting behind your computer? Are you watching television?

It can mean numerous things; most likely this is asking you what your job is; it could also mean "what do you do for fun" or "what are your hobbies"