You really do release Oxytoxin, but who the fuck would let someone hug them if they don't already trust the person.

But...
How does your body know you're hugging someone?

psychology. You obviously have to be conscious for it.

The skin can feel stuff, which sends impulses to the brains, which subconsciously sends impulses to glands which then secrete Oxytocin.

To be honest, the amount of Oxytocin produced by the person is probably minimal. It is mostly used during child birth and breast feeding. Some studies also suggest during sex. The purpose of Oxytocin is to give positive feedback to the person producing it; it makes the individual feel affection for the person (probably a baby) in question, leading to less abandoned young during caveman days.