The flaw, called the IOMobileFrameBuffer, allows an application to execute arbitrary code with kernel privileges which means that an attacker could gain unrestricted access to the timepiece.
To do that, open the Watch app on your iPhone, tap on General > Software Update and you should see the prompt for the update. To install the update, your Apple Watch needs to be on its charger and in range of your Wi-Fi connected iPhone.
Earlier this week Apple released iOS and iPadOS 14.7.1 to patch the same serious security issue that the watchOS 7.6.1 update is patching.
The update weighs in at 64.6MB which seems rather a big update for one tiny flaw.