Red Squad did have a respect for Captain Sisko, so they probably would have handed the ship over regardless of orders.
Also there is senority. Sisko and Picard have been captains longer than Watters, so would have senority over him, and therefore be the highest ranking officer onboard.
However, by all logic, Nog would have senority just by being an actual ensign. Though the question of department comes into play. Lt. Bashir would also outrank Watters and Nog, but he's a medical doctor, not a line command rank. He would usually not be given command of any ship even if he was an admiral. Nog is engineering, rather than command. Would Watter's, a command cadet, outrank Nog, an engineering ensign? Regardless of Watter's unconfirmed field promotion to Captain.