The correct answer is:
The amplitude of the waves decreases as the sound spreads out and is absorbed by air.
When sound is produced, it radiates outwards in all directions. As the sound waves travel away from the source (in this case, the headphone earpieces), the amplitude of the waves decreases due to the spreading out of the sound energy over a larger area and potential absorption by the air, leading to a reduction in perceived loudness for someone standing farther away.