What lagwagon said ^^^^
To set up Apple Pay on the watch, you also need to give your watch a passcode so it will lock when it's removed from your wrist.
When you put on your watch, you can unlock it either by entering the passcode on the watch or by using TouchID on your iPhone. You won't have to enter your passcode again until you take it off because it's periodically checking for your skin by using the LED sensors on its back.
If you don't want or need to put Apple Pay on the watch, setting up a passcode is purely optional.