Select the most appropriate option that can substitute the underlined segment in the given sentence.
The rebels laid up their arms.

The correct phrasal verb to use in the context of surrendering weapons is "laid down" (from lay down).
Lay down arms: To surrender; to give up weapons.

Lay up: To put away or store up; also means to be confined to bed due to illness.

Lay out: To spend money, or to arrange/design a plan.

Lay by: To put aside or save money for future use.

Thus, "laid down" is the appropriate substitute.