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What does Settings > Privacy > Diagnostic & Usage Data mean?

I think there is a chance that I am being watched.

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Nobody is watching your phone (at least from this specific point).

The setting you are talking about is called Diagnostics & Usage. It looks like this:

diagnostics and usage screen on ios

It explicitly says what it does:

Help Apple improve its products and services by automatically sending daily diagnostic and usage data. Diagnostic data may include location information.

If you feel like you do not want to share your iPhone application usage data then just check Don't Send.

Note that diagnostic data will be saved, but not sent to Apple, on your device in any case even if you choose Don't Send.

If you proceed into Diagnostics & Usage Data then you can see what application and when saved its data on your phone. What looks something like this:

list of applications with their diagnostic data and date

In case you want to find more information about this topic, consider visiting this official Apple page.

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1.What is Diagnostics & Usage Data?

A log of system events that happen on iOS device. This log isn’t tracking your every move, but it is creating entries whenever events like an app crash happens.There is a lot of noise in there, but sometimes you can find important information about issues related to your device.

2.What it may contain?

Like App Crashing Logs:

Sometimes when an app is problematic, it is obvious. You see it freezing, hanging or crashing to the home screen. But there are times when an app could be malfunctioning in the background and one way to see that is if the app name shows up in your Diagnostics & Usage data.

And other things like:

Apple Wireless Diagnostics Data: Entries starting with “awdd-[yyyy-mm-dd]”

Memory: Entries starting with “JetsamEvent-[yyyy-mm-dd]”

Other Entries: Certain entries that you will see daily are “log-sessions”, “log-[daemon]” and “CoreTime”. There isn’t much value into reading these, but you will see them.
Entries like “Carousel”, “BTServer”, “searchd” may not show up everyday.

Reference:Digging into Diagnostics & Usage Data

3.How to disable Diagnostics & Usage Data?
If you worry about privacy=> Open up the Settings app and navigate to General > About > Diagnostics & Usage. Then tap on Don’t Send.

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