Correct option is (a) mg/k
To elaborate: When the system was stationary, the extension in the spring will be xo such that kxo= mg or x0 = mg/k.
When the cables are cut, the entire system will be in free fall. The observer will add a pseudo force on the block upwards and equal to mg.
Now the spring has an extension of mg/k and the restoring force by the spring will be corresponding to this extension, so the amplitude of SHM for the observer is mg/k.