Yes, you can change over to encrypted passwords without locking yourself out. Please read "User Password Settings" before changing anything so you can be familiar with all of the options.
The option is grayed out because AllowPasswordFormatChange has been set to "false" in your web.config or user.config. Open your user.config and add <add key="AllowPasswordFormatChange" value="true" /> or change the value to true if it is there and set to false. Once your user.config is correct, touch your web.config and then re-visit your Site Settings.