Apple has a well written support document with recommendations for about a dozen settings you’ll need configured properly to enable the ability to unlock your computer with your Apple Watch. The document also covers system requirements. [Read it Here]
However, you may find that despite following all the instructions in the support document, the system setting is missing that allows your Apple Watch to unlock your Mac as shown below. It should appear in System Preferences as a checkbox item in on the Security & Privacy General tab. You may have seen it there before, and now it’s gone.
If the option to unlock your Mac with your Apple Watch is missing, try restarting the computer then check Security & Privacy again.
You may also want to try restarting your watch and your iPhone just to make sure all devices are properly connecting to your iCloud account.
You can restart your Apple Watch by pressing and holding the crown and side button at the same time.
You can restart your iPhone by pressing and holding the power button in older iPhones or in newer iPhones you can go to Settings > General > and scroll to the bottom to find Shut Down.
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