[SalesForce] Not able to create lookup relationship of same object on Activity Object

First, I made a small edit to your trigger. Instead of the single equal sign, you need a double equal sign. Also, I made it check if the old value was unchecked so you don't keep making records over and over.

trigger TRTimeOffAfterUpdate on Time_Off__c (after update) {

for (Time_Off__c toEvent : Trigger.new) {
    if(toEvent.Is_approved__c==true && Trigger.oldMap.get(toEvent.Id).Is_approved__c == false){
   // Event event = new Event
   Event ev= new Event 
   (
        OwnerId = toEvent.CreatedById,
        StartDateTime = toEvent.Start_date__c,
        EndDateTime = toEvent.End_date__c,
        Subject = toEvent.Pattern__c,
        Description =  toEvent.Comment__c,
        ShowAs = 'Out of Office'
    );
    insert ev ;             
}
}

Does this work?

I can't offer you any insight into why you cannot do this, you just can't unfortunately, it's a seemingly arbitrary limitation of the platform and the Product2 object. Unless someone who knows about the internals of the platform comes across this I doubt you'll ever get a definitive answer.

In terms of working around it though, the only way to achieve this is to create your lookup as a standard non-required Lookup and then enforce that the value of this lookup cannot be blank using a validation rule.

Your validation rule will look something like this:

ISBLANK(ProductId__c)

If the Product is deleted then this will result in the value of the field being cleared, as per the default 'Clear the value of this field.' behaviour, which will prevent you updating the child record until a valid lookup ID is entered.

If you want to change this behaviour you'll have to write a before delete trigger on Product2 with your desired logic.