What does the option "Auto share projects located in git repository" of EGit mean?
In Short: Yes the option is necessary, otherwise you will have to manually share the project with the repository it belongs to.
The option Auto share projects located in Git repository usually saves you the extra step of sharing the created or imported project with a repository.
A project that belongs to a certain repository (in Git: is located within the work directory) needs to be marked as such. Therefore you would open the projects context menu, go to Team > Share Project and select the repository.
Only thereafter you will see decorations (e.g. current branch) and be able to commit changes of that project etc.
Whenever a project is created or imported that is located within the work directory of a repository known to EGit, it will be automatically be shared if the above option is enabled.