A:
The phone does not have to be in your pocket (or purse), and the distance you can stray from the phone seems to vary. I have a GS3 with a custom ROM, and the previous ROM required me to be within 30-35 feet of the phone before disconnecting. With a newer custom ROM I just installed, it seems to have doubled the distance (at least to 40-50 feet). So your phone's bluetooth must be a factor.
One you go past the distance, your watch buzzes twice to let you know. The watch still functions as a watch, and automatically reconnects again when you are back in distance (and buzzes you twice again).
I believe there is even an extension that helps you find your phone (haven't used it).