Step 1: Two actions again. Her husband came is the shorter, sudden action.
Step 2: She was doing something before he came, and that action was still in progress at the moment he arrived, watching TV.
Step 3: An action in progress at a certain past moment, interrupted by another action, needs Past Continuous: was/were plus verb-ing.
Step 4: She is singular, so we use was watching.
Step 5: Final sentence: She was watching TV when her husband came.
Answer: option 2, Was watching.