The given sentence is an interrogative sentence.
According
to the rules of narration and reporting, if the reporting verb is in
the past tense, the tense of the reported verb is changed into its
corresponding past form. The reporting verb in the given sentence,
'said', is in the past form. Therefore, the reported verb, 'are' will
change into 'was'. The first person pronoun 'I' will change to third
person 'she'. In an interrogative sentence, in the indirect speech the helping verb is put after the subject.
Thus, in indirect speech the sentence must be,
I asked Nelly what she was looking for.
Thus option B is the correct answer.
Options A,C,D,E are incorrect as they do not follow the rules of Narration and Reporting.