Melatonin, a widely applied cosmetic active ingredient, has a variety of uses as a skin protector through antioxidant and anti-inflammatory functions as well as giving the body UV-induced defenses and immune system support. In the body, melatonin is synthesized from a tryptophan amino acid in a cascade of reactions, but as melatonin is toxic at high concentrations, it is metabolized in the human skin by the cytochrome P450 enzymes. The P450s are diverse heme-based mono-oxygenases that catalyze oxygen atom-transfer processes that trigger metabolism and detoxification reactions in the body. In the catalytic cycle of the P450s, a short-lived high-valent iron(IV)-oxo heme cation radical is formed that has been proposed to be the active oxidant. How and why it activates melatonin in the human body and what the origin of the product distributions is, are unknown. This encouraged us to do a detailed computational study on a typical human P450 isozyme, namely CYP1A1. We initially did a series of molecular dynamics simulations with substrate docked into several orientations. These simulations reveal a number of stable substrate-bound positions in the active site, which may lead to differences in substrate activation channels. Using tunneling analysis on the full protein structures, we show that two of the four binding conformations lead to open substrate-binding pockets. As a result, in these open pockets, the substrate is not tightly bound and can escape back into the solution. In the closed conformations, in contrast, the substrate is mainly oriented with the methoxy group pointing toward the heme, although under a different angle. We then created large quantum cluster models of the enzyme and focused on the chemical reaction mechanisms for melatonin activation, leading to competitive O-demethylation and C6-aromatic hydroxylation pathways. The calculations show that active site positioning determines the product distributions, but the bond that is activated is not necessarily closest to the heme in the enzyme-substrate complex. As such, the docking and molecular dynamics positioning of the substrate versus oxidant can give misleading predictions on product distributions. In particular, in quantum mechanics cluster model I, we observe that through a tight hydrogen bonding network, a preferential 6-hydroxylation of melatonin is obtained. However, O-demethylation becomes possible in alternative substrate-binding orientations that have the C6-aromatic ring position shielded. Finally, we investigated enzymatic and non-enzymatic O-demethylation processes and show that the hydrogen bonding network in the substrate-binding pocket can assist and perform this step prior to product release from the enzyme.