What does this traffic sign indicate?

Your choice 1 is correct. This is a warning sign, so it does not grant anyone priority and it does not prohibit traffic. It simply warns that you must expect horses or riders on or near the roadway, for example because there is a riding stable nearby, riders cross the road, or a bridle path runs alongside and may lead onto the road.

For you as a driver, the rule of thumb is: reduce speed early, be ready to brake, keep extra lateral distance when passing, and avoid loud or sudden actions (honking, revving, abrupt steering) because horses can get startled and behave unpredictably. If necessary, stop and let the horse pass safely.