The difference between naturalistic observation and participant observation is that

Naturalistic observation is when the observer collects data or a set of data without confounding with the current behavior. The behavior is observed directly through human senses but not well understood because the motives are unknown. Participant observation, on the other hand, is when the observer participates on an ongoing event or activity, not just observing it in third person, but actually experiences the behavior. In this kind of observation, the qualitative data is more dedicated compared to naturalistic observation.