Setting up the feature that allows you to unlock your Mac with your Apple Watch ( must have OS X Sierra & iOS 10 ) has been a bit more tedious than I had anticipated. I believe this is due to a bug.
Two-factor authentication is new. This needs to be set up prior to attempting to use Apple Watch to unlock.
If you have Two-step authentication disable it first.
Do not try and check the box in System Preferences > Security & Privacy before setting up Two-factor authentication correctly.
The issue is that once you check the box and authenticate, and if Two-step is still on, then OS X hides the checkbox. There is no way, that I’ve found, to re-try this.
Update: To get the checkbox back, simply reboot, reauthenticate, and it should work again.