Of course they will exercise the option, it will be up to him to decide, and it's very likely he goes back. Possibility he stays is if Madrid is stacked at the CF position, or if he becomes an undisputed starter at Juve (something he should already be), and we can get to CL semis again or something and he doesn't want to share minutes with Benzema.
But in all likelihood, I believe he will go. It will be very tough.