Step 1: Identify the nerve and muscle. The superior oblique muscle is supplied by the trochlear nerve (cranial nerve IV). Its palsy is the question's subject.
Step 2: Recall the action of the superior oblique. The superior oblique is mainly a depressor of the eye when the eye is adducted, and it also intorts and abducts. Its dominant clinically tested action is depression in adduction (looking down and in, as when reading or going down stairs).
Step 3: Work out the type of diplopia. Because the muscle depresses the eye, its weakness leaves the eye relatively elevated, so the two images are separated in the vertical plane. This produces vertical diplopia.
Step 4: Determine when the diplopia is worst. Diplopia from a paretic muscle is maximal in that muscle's field of action. The superior oblique acts on downgaze (and adduction), so the image separation is greatest on looking downward. Hence the diplopia is vertical and worst on downgaze (downwards).
Conclusion: Trochlear nerve damage produces vertical diplopia that is maximal on downward gaze, matching option B.