well the idea is that a word's meaning can be derived from its context (those context clues from grade school strike again). The co located words are simply the context. Since "ship" and "boat" frequently occur in similar contexts, they are similar words.

Honestly, this blog post felt like they were trying to explain word2vec for the hundredth time, but tried real hard to explain it differently--so much so that it just made it more confusing.