How were sets of manuscript illustrations often stored in the library…

The correct answer is Option 3:  Wrapped up in a piece of cloth and stored as a bundle

Sets of manuscript illustrations were often wrapped up in a piece of cloth and stored as a bundle in the library of the king or patron.

Manuscript illustrations were methodically conceived in thematic sets (each set comprising several loose paintings or folios). Each folio of painting has its corresponding text inscribed either in the demarcated space on the upper portion of the painting or on its reverse. Accordingly, one would have sets of the Ramayana paintings, or Bhagavata Purana, or Mahabharata, or Gita Govinda, Ragamala, etc. Each set was wrapped up in a piece of cloth and stored as a bundle in the library of the king or patron.