While the wrist-detection feature on the Apple Watch is supposed to ask for a passcode if it is removed from your wrist, a video posted by iDownloadBlog demonstrates that the Watch can be reset and paired to another iPhone without the need for a passcode.
The video shows that there is no protection on the device such as Activation Lock in iOS 7 and above on the iPhone and iPad. The video clearly shows there is no need for a passcode to wipe the wearable device.
The hard reset on the Apple Watch is performed by a long-press on the Contacts button until a power-off option is displayed. If a user performs a Force Touch on this option, a prompt comes up, offering to erase all content and settings on the Watch. This can be executed by placing the Watch on a charger, with no passcode required.
One good note in the report is that the Apple Watch does at least protect your data that is stored on the Watch. Of course, that is dependent on the user having a passcode lock set on the device. Making sure to have a passcode on the Watch prevents the bad guys from accessing the personal data on the device.
Hopefully, Apple will address this issue in the near future with an update for the device.