So, when my character approaches an enemy with a fully closed line that says hidden, I except him to get a sneak hit. Instead, right I use R1(attack). The stealth "eye" opens and they turn around, thus negating my bonus. This only happens sometimes, what am I doing wrong? Thanks.

Maybe you're level is too low, Or they heard you.
You don't need to be hugging them.
As long as the pickpocket option shows up you should be able to backstab

I had that issue to but that was before I got the backstab perk. Once I got that they never hear me. Plus I'm using daggers and they make a lot less noise then a sword. When I was using a sword it happened every once in a while but not while using daggers.

^ To second him i bet it would be your stealth being too low. A problem i sometimes have with stealth is that it will show the eye when i am obviously not detected and is stuck there until i get up then resneak.

happen to my 100 master assassin from time to time. more often when I try to use power attack. I think its a bug we have to live with it.