As what Phil99 and Rich_L have said, to use the optical cable, you need a device that is capable of decoding Dolby Digital, which is usually in the shape of an amplifier or mid-high range all-in-one DVD player. There is no 'cheap' option to convert that 5.1 signal to anything other than another 5.1 digital signal (i.e. coax from optical).
Otherwise, you have to use an Xbox 360 cable that has normal 2 channel sound (Red/White). It's kind of silly that that cable doesn't come with normal 2 channel sound.