The Czech Republic international joined the Hornets on loan from Udinese at the start of the season and has spearheaded the club's promotion charge, finding the net 20 times.
Vydra, just 20, will compete against Blackpool's Tom Ince and Crystal Palace's Glenn Murray for the Championship honour, with nominees voted for by managers from the division.
Vydra and Ince along with Wilfried Zaha, again at Palace, have made the three-man shortlist for Young Player of the Year, which runs across all three Football League divisions.
The winners will be announced at Sunday's Football League Awards 2013 in London.
Watford are keen to tie down Vydra on a permanent deal this summer, regardless of whether they clinch promotion to the Premier League, although a host of top-flight suitors are circling following his exploits this term.