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generis
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My choice is B option.

1) Can only is more preferred to Only Can. So i eliminate A and E.

2) Now here the intended meaning is Muppet creator observed that puppets can only convey a limited range of expressions, that is why he redesigned puppets in order to allow them to express wide array of emotions.

In A, C, D and E, see carefully the word 'only' before convey is putting emphasis on 'convey', not the expressions. The intended meaning is disturbed. So B left.
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option A,E can be eliminated on the basis of wrong position of 'only'.It changes the intended meaning from television puppets being lower preferred choice(intended meaning ) to the only choice .
C misses a verb(incomplete clause)
between B & D - D also can be eliminated on the basis of meaning as it says 'can only convey'(as if tv puppets are capable of doing something else too.
B CLEARLY STATES MEANING AND HENCE IS THE WINNER
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Here's my reasoning for going with answer choice B

A) only can convey a limited range of expressions, -- It means ONLY telvelsion puppets can convey limited range of expressions

B) could convey only a limited range of expressions,--The main verb "Began" is in the past tense . Jim Henson , observed something is past so use of could is correct . Only is placed correctly

C) conveying a limited range of expressions only,-- only is misplaced.Also conveying seems to means that television puppets are cureently conveying something

D) can only convey a limited expressive range,---Only is misplaced

E) only could convey a limited expressive range,-- Only is misplaced
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A, D and E distort the meaning of sentence which is trying to compare the limited range of expressions by the television puppets vis-a-vis the flexible foam puppets.

Between, B and C, C uses "limited" as well as "only", almost looks redundant. B is the winner.
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The official explanation is here.
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Observing that traditional television puppets only can convey a limited range of expressions, Muppets creator Jim Henson began creating characters out of flexible foam rubber in order to allow them to express a wider array of emotions.

A) only can convey a limited range of expressions,
—> only is wrongly placed

B) could convey only a limited range of expressions,
—> correct

C) conveying a limited range of expressions only,
—> a verb is missing for that clause

D) can only convey a limited expressive range,
—> tense is wrong for “can”. Subordinate clause usually follows the main claue’s tense.

E) only could convey a limited expressive range,
—> only is wrongly placed.
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1) The word "only" will generally come after an auxillary verb like can. Using this we can eliminate A & E
2)The correct idiomatic phrase is "range of expressions" not expressive range.

So the correct answer is B
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