Observers watch, but they are not involved in events or there to be entertained. They could be paid to observe, or there to review or judge. They are there deliberately to observe. The word implies a distance from the observer’s emotions, so they would not be clapping and cheering.

Spectators are also there to watch. but they could be there by accident. They are not there to judge or enjoy. Spectators might have seen an accident on the road.Spectators tends to imply a more accidental or voyeuristic aspect, unless otherwise indicated.

Participants are involved. That changes the meaning of the sentence so that the actors would be clapping. So you’re right that participants is wrong.

The audience clapped and cheered after watching a great performance at a play.

a) audience

b) observers

c) spectators

d) participants