Apple published a page on its website detailing how the Watch monitors your heart rate, what its shortcomings are and what wearers can do to fix those issues.
It’s an interesting read. Here’s an excerpt:
Blood is red because it reflects red light and absorbs green light. Apple Watch uses green LED lights paired with light‑sensitive photodiodes to detect the amount of blood flowing through your wrist at any given moment. When your heart beats, the blood flow in your wrist — and the green light absorption — is greater. Between beats, it’s less. By flashing its LED lights hundreds of times per second, Apple Watch can calculate the number of times the heart beats each minute — your heart rate. In addition, the heart rate sensor is designed to compensate for low signal levels by increasing both LED brightness and sampling rate.
The heart rate sensor can also use infrared light. This mode is what Apple Watch uses when it measures your heart rate in the background.