Step 1: Recall the two words.
Order is the highest derivative present. Degree is the power of that highest derivative, but only after the equation is free of roots on the derivatives.
Step 2: Write the equation.
\[ y = x\frac{dy}{dx} + \sqrt{a^2\left(\frac{dy}{dx}\right)^2 - b^2} \]
Step 3: Move the root alone.
\[ y - x\frac{dy}{dx} = \sqrt{a^2\left(\frac{dy}{dx}\right)^2 - b^2} \]
Step 4: Square both sides.
\[ \left(y - x\frac{dy}{dx}\right)^2 = a^2\left(\frac{dy}{dx}\right)^2 - b^2 \]
Now there is no root, so we can read off the degree.
Step 5: Read order and degree.
The highest derivative is $\frac{dy}{dx}$, a first derivative, so order $m = 1$. The highest power of it is 2, so degree $n = 2$.
Step 6: Add them.
\[ m + n = 1 + 2 = 3 \]
Always remove roots on the derivatives before counting the degree.
\[ \boxed{m + n = 3 \text{ (Option 2)}} \]