The correct option is E dreaming
Option D, dreaming, is the correct answer. The author is dreaming about his dead wife. This is further supported by the poet saying that he woke up in the last line. He dreamt of his wife the way she was when she was living, not thinking of her as a corpse. Option A suggests that he thought of her exaggerating her qualities. Line 14 clearly states that she was already virtuous in her life, and that's how he chose to remember her. Thus, option A is incorrect. Options B,C and D are variations of the same statement. We can already understand from the poem that the poet was dreaming. Therefore, he did not have any delusions, neither was he conjuring up his wife's image. From the last line, we can conclude that he was very much capable of separating between dreams and reality. Hence, options B,C and E are all incorrect.