You can't "watch packets go by", without being on the network in the first place
You can, There are tools that 'sniff' raw data out of the air, wether its encrypted or not.
I believe the only part of the data stream that is not encrypted (if using encryption that is) is the mac address (although you may want to double check me on that one).
As i said before if you want very secure use WPA and a mac address access list. Someone would need to sniff your key (very difficult with WPA, not so hard using WEP esp. 64bit) and then as well as doing all that they need to spoof the address as well. (just to add some more headache factor :)
Hiding the SSID will not hide it from anyone who knows how to do the above (very few), so it is relitively pointless. However it is handy if you dont want joe user next door, or some common thief & his PDA to know you have a PC in your house.