Final answer:
Option (3), Characters say their thoughts out loud while facing each other during dialogue, which is a conversation between two or more characters.
Step-by-step explanation:
When characters say their thoughts out loud while facing each other, it is referred to as dialogue. Dialogue is a conversation between two or more characters, which contrasts with a monologue, where one character speaks their thoughts aloud with other characters present, and a soliloquy, where one character speaks their thoughts aloud while alone on stage. A flashback is a device used to show past events and is usually not characterized by characters speaking their thoughts out loud to each other.
In the context of your question, dialogue occurs within the narrative of a story or play when characters engage with each other verbally. The dialogue serves to reveal character traits, their relationships, the setting, and essential backstory details. Examples of dialogue are prevalent in literature and plays, and it is fundamental in moving the plot forward and providing depth to characters.