Specifies whether the embedded HTML markup must be parsed and any syntax errors found in it (e.g. missing closing tags) fixed.

Since HTML tags embedded in the user text (character data) are supposed to be a valid HTML markup (which the user must have prepared manually so as to be a fragment in the whole HTML document), the entire text containing it may be passed into the output as is. So it will work, when this option is unselected (false). The advantage is that the generator will work faster, because no extra processing is needed of every text potentially containing HTML tags.

But the problem is that the user-prepared HTML markup found in doc-comments may be actually wrong. The typical error is that a tag (like <b>) is open, but never closed. When that is passed to the output as is, the whole piece of the result HTML document below it will be distorted! (You have probably seen such things in the standard JavaDoc).

To prevent such distortions, you can select this option (set it true). Then, for every text potentially containing HTML tags the parsing will be done and any HTML syntax errors fixed. That may still result in some distortions, but they will be localized only to the given text fragment. The whole HTML document will be intact!

The disadvantage of this is that every text that may contain HTML markup will be parsed for it, which will take some processing resources, of course!
Another potential problem may be that the currently used HTML parser is the one provided by standard Java library package: javax.swing.text.html. That parser supports only HTML 3.2. If you are going to use in your doc-comments something more complicated than that, that parser may do something wrong.
Because of those considerations, this option is provided in the first place. In the case HTML 4.01 output, it is set false by default.

When XHTML is generated, the parsing of the embedded HTML will likely be required anyway, because any embedded HTML tags must be converted into XHTML (e.g. simple tags must have proper XML endings "/>"). So, in that case, the default option value is true. (Of course, if your embedded HTML is already XHTML, you should unselect this option!)

Note: Which type of output is generated is controlled by the option: "Output | Markup"