Correct Answer: Nationalism

Solution : Given:
1. Native 2. Nationality 3. Nation 4. National 5. Nationalism

Step 1: Compare the first letter of all the words. Since all the words start with the same letter N, then move on to the next letter.
Step 2: The second, third, and fourth letters of all the words are the same, i.e., a, t, and i. So, move on to the next letter.
Step 3: Compare the fifth letter of Native, Nationality, Nation, National, Nationalism. (Nationality, Nation, National, Nationalism) will come before Native as o comes before v according to the alphabetical system.
Step 4: The sixth letter of (Nationality, Nation, National, Nationalism) are the same. Nation will come first from these words as it has the least number of letters. 
Step 5: The seventh, and eighth letters of (Nationality, National, Nationalism) are the same. National will come before (Nationality, Nationalism) as it has the least number of letters as compared to Nationality and Nationalism.
Step 6: The ninth letter of (Nationality, Nationalism) is the same, then move on to the next letter.
Step 7: Compare the tenth letter of (Nationality, Nationalism). Nationalism will come before Nationality as s comes before t according to the alphabetical system.
Therefore, the sequence is Nation, National, Nationalism, Nationality, Native.

So, the word Nationalism appears in the third position when the given words are arranged in the dictionary order. Hence, the first option is correct.