Explanation:

If the CM dies or resigned from his post there will be no governor rule or presidency's rule ( article 356 of Indian constitution) but the ruling party will choose a person for that designation. And there is no such rule that he should be elected member of legislative assembly.( if he is then there is no complications and most of the times party chooses elected member) but if the party select a member which is not elected member of legislative assembly then he/she must have to win election within 6 months. Otherwise he/she can't be remain as a CM of respective state. Therefore as per given options the Council of Ministers automatically stands dissolved. Hence option 1st is correct.