Mikel Arteta's men have not confirmed their spot in the last eight of Europe's elite tournament yet, but they are virtually guaranteed to advance after destroying PSV Eindhoven 7-1 in the first leg of their last-16 tie last week.
Following the formalities of Wednesday's second leg, Arsenal will be drawn to take on either Real or Atletico in the quarters, and Los Blancos currently possess a 2-1 advantage from the opening encounter with their bitter rivals.
Asked by Sports Mole whether he would rather see Arsenal face Atletico or Real in the quarter-finals, Watts just about sided with Atletico given the quality of Real's attack, although he admitted that the well-documented defensive prowess of Diego Simeone's side could mean the Gunners have a stronger chance of beating the holders.
"It's really hard, this one, because why would you ever choose to play a team with the attack of Bellingham, Vinicius, Mbappe and Rodrygo? What madman chooses to play that team?" Watts said.
"But then I look at how Arsenal play against teams who frustrate, sit deep and defend, everything that Atletico Madrid are under Diego Simeone, and think maybe they've got a better chance against Real Madrid.
Watts: 'With a gun to my head, I pick Atletico'
"If you put a gun to my head, I'd choose Atletico because how can you choose to come up against an attack that Real Madrid have got? Atletico lost to Getafe in La Liga, so I think it's probably a more winnable tie. But I look ahead to two games against Atletico Madrid with absolute dread of what they will be like.
"It's not going to be a spectacle. I can just see Arsenal toiling, trying to find a way through a Diego Simeone team. I'd probably err on the side Atletico, but I don't think it's going to be much fun."
As Arsenal fans wait to learn which Madrid venue they will be visiting next month, Arteta's men must navigate 90 minutes of Wednesday's second-leg dead-rubber with PSV, whom they created Champions League history against in the first leg.
The Gunners became the first team to score seven goals away from home in a Champions League knockout game at the Philips Stadion, where their septet of strikes came from just eight shots on target, an exceptional display of ruthlessness from Arteta's team.
Arsenal were lauded for overloading the PSV box at every opportunity in the Netherlands, although they have since reverted to their lacklustre offensive ways, drawing 1-1 with Manchester United in Sunday's Premier League showdown.
Such a display will prove inconsequential on Wednesday evening, though, and Watts is expecting a "weird night" at the Emirates given how little there is at stake for Arteta's side.
Why Arsenal vs. PSV second leg could be a "weird night" at the Emirates
"PSV played into Arsenal's hands, no doubt about that," he added. "But what was good was to see Arsenal take full advantage of that. They were so ruthless in front of goal, which is something you don't always say about Arsenal.
"There was real intent about them. For Timber's goal, there were seven bodies in the box. There were six for when Nwaneri made it 2-0. They really got forward and supported the attack, and that's what you want to see from this Arsenal team at the moment because they're struggling.
"It was a breath of fresh air. We all needed it, because it's been a bit of a struggle the last few weeks. And that just felt like lifting the gloom a little bit. That's why what happened against United was such a shame because it sucked the energy out of that performance.
"It'd be interesting to see what Mikel does on Wednesday night. You're in a very rare opportunity here to be able to rest and rotate in a Champions League last 16 tie because you know the game is over. If people are expecting massive wholesale changes, I don't think that's going to happen. Mikel just doesn't operate like that.
"He will make changes, but he'll still go relatively strong. I'm intrigued to see how he handles it and how the crowd handle it as well. It's going to be a weird night for everyone because there's just no jeopardy. I wouldn't be surprised if there's a lot of empty seats."
Ahead of a crunch Premier League clash with top-four rivals Chelsea at the weekend, Arteta has been tipped to make a number of alterations to his starting lineup, although he is still missing Bukayo Saka, Gabriel Jesus, Takehiro Tomiyasu and Kai Havertz through injury.
Gabriel Martinelli is available again, though, having unexpectedly recovered from a hamstring injury in time for the trip to Old Trafford, but he is one of three players who would miss the first leg of any quarter-final if he is booked.
Should Arteta "reward" Arsenal youngsters in Champions League clash?
Raheem Sterling and Jurrien Timber are also one yellow card away from a ban, and the latter's risk means that Ben White is in with a strong chance of making his first start since undergoing a knee operation in November.
Watts would also like to see academy products such as Nathan Butler-Oyedeji - who made his senior debut against Dinamo Zagreb in the league phase - given a run-out, saying: "It's the perfect opportunity to play Ben White from the start.
"He's been drip fed back into the team since he's come back, which I can understand. You don't want to take any risk, but I think this is certainly the game. Can you get 60 minutes under his belt? You would imagine so. So I'd be surprised if Ben White doesn't play this game, Timber's played so many minutes recently.
"Tierney, Kiwior, Zinchenko, those sort of players could get a bit of a run out. I don't think any of the youngsters who've been on the bench will start, but there's a good opportunity off the bench in the second half to reward them, just for the time and effort they've put into the last couple of months in training to be a member of this squad.
"I'm looking particularly at Nathan Butler-Oyedeji. He's done a lot behind the scenes in training and hasn't yet been rewarded really with any significant amount of minutes. And this is a really good opportunity for him potentially in the second half to get that."
Arteta could join an elite club of managers by overseeing another win on Wednesday evening, where Ethan Nwaneri is also capable of breaking a Champions League record set by Kylian Mbappe.
Written by
Ben Knapton