Iwobi suffered a hamstring injury while in action for the Toffees against his former club Arsenal in December and is yet to feature under Ancelotti.
He was replaced by Cenk Tosun in the 11th minute of the goalless draw against the Gunners after picking up the injury.
For the first time since his appointment last month, Ancelotti has been able to work with a full complement of players, save for midfielder Jean-Philippe Gbamin, and this week reintroduced the “fantastic” Andre Gomes for elements of training sessions.
“Róicharlison is okay and has trained all week,” Ancelotti told evertontv.
“This week we had only Gbamin out, the others are all fit and in good condition.
“Richarlison and Iwobi are available [to face Watford].
“Gylfi Sigurdsson is available.
“So it will be difficult to choose my line-up.
Iwobi linked up with Everton up from boyhood club Arsenal last summer.
The 23-year-old has scored one goal in 16 league appearances for the Merseysiders.