Enter your Apple Watch 4 digit passcode.
It also appears you have unlock your Apple Watch with your iPhone enabled, so after putting your Apple Watch on your wrist, unlock your iPhone, and it should unlock your Apple Watch.
Once you Apple Watch is unlocked either via the passcode or the iPhone, as long as you do not take it off your wrist, or wear it so loosely that it looses contact with your wrist, your Apple Watch will remain authorized, and it should unlock your iPhone the next time you want to unlock it.
Your Apple Watch will also work with Apple Pay after it has been authorized for the day, which is very convenient if you have Apple Pay setup. I do not even have to remove my iPhone from my pocket to pay for things. Just double click on the oval side button and select my payment type, and wave the face of my Apple Watch over the scanner.
Some iPhone unlock with Apple Watch articles:
https://www.apple.com/newsroom/2021/04/ios-14-5-offers-unlock-iphone-with-apple-watch-diverse-siri-voices-and-more
https://www.macrumors.com/how-to/unlock-iphone-wearing-mask-with-apple-watch
https://support.apple.com/en-us/HT212208