The hosts sit second in the table with nine points from a possible nine, whilst Watford have seven points and sit fifth.
Full-backs Andy Yiadom and Felipe Araruna will be out for a number of weeks.
Midfield maestro John Swift has sustained a hamstring injury and so is unlikely to feature until after Christmas.
For the travelling side, Ismaïla Sarr and William Troost-Ekong are both back fit.
Reading possible starting lineup:
Cabral; Moore, Morrison, McIntyre, Richards; Laurent, Rinomhota; Meite, Ejaria, Olise; Puscas
Watford possible starting lineup:
Foster; Cathcart, Kabasele, Wilmot; Ngakia, Chalobah, Cleverley, Sema; Sarr, Quina; Pedro
Ones to Watch
With the two sides having conceded just once between them in their six combined matches, the ones to watch will no doubt be in defence.
However going forward both sides have in-form Joao's at their disposal, with Lucas Joao for the hosts and Joao Pedro for the visitors.
Injury struck though last week and Lucas Joao is unlikely to feature, but the Brazilian for the visitors is expected to light up the turf with his electric bursts of pace and clever ball play.
In the absence of Joao, it will be Ivorian Yakou Meite who the fans will be looking to, as he has topped scored for the club in the past two seasons, and has one goal from two appearances in this campaign.
With Watford's sustained period in the Premier League, it has been five years since the two sides met in the league, a 4-1 win for Watford at Vicarage Road, as Reading made 11 changes in preparation for their upcoming FA Cup Quarter-Final Replay.
However they have met more recently in the League Cup, a 2-0 Watford win at the Madejski saw a wonder goal from midfielder Domingos Quina.
Overall the sides have met a staggering 118, with 48 Watford wins against Reading's 44.
Paunovic is expecting a tough match against his former team-mate.
"We know each other – he was a very good former teammate. He is a fantastic guy as a player and a teammate and had a great career.
"Now as a coach, he is doing a great job; he is a proven manager and he has done a great job in all the countries he has been in.
"So it’s another test – we know that this is one of the best teams in the league and that they’ll be contenders for the promotion spots.
"We respect everyone, but we focus on ourselves. When we get onto the field, we get ready to compete – no matter who is in front of us.
"It’s going to be a difficult challenge this weekend for our team – but we will focus on ourselves and be ready."
Similarly, Ivic insists that the onus is all on his team to prove that they want to win.
“Reading is the first team in the Championship and we respect what they’ve done until now,” said the Head Coach.
“They have a lot of good players, a good team and a good coach and it will be very difficult, maybe the most difficult game we’ve had so far. Our target is the same as every time, we will go to play the game and fight for the three points, this is our target.
“We need to think about our game, about ourselves, how we’ll be in this game and what we want to do with the ball and without the ball. My players must be ready, they must be hungry and show they want to win more than the other team.”
How to Watch
The game is available on both club's iFollow services for a fee of £10.