Mizuchi is definitely in on the whole magical thing. His first name is literally a demon's name, and his surname looks fake. Frankly, I get the vibe that he already knows everything, and is seeing whether or not he can trust us. And even if he doesn't, Maniac's right: if we don't tell them, they will try to find out on their own, and that is the quickest way for them to get themselves killed.
I'm going with B, though with the added caveat that Lluvia not immediately reveal herself, and that we don't explain about the knights (or whatever their name is slipped my mind whoops). Keep knights secret just in case Mizuchi is a flat-out evil demon (if he is, he knows we're mages, so no sense keeping that bit a secret), and keep Lluvia secret so she can help us escape in case this turns into BURN THE WITCHES.
--
Oh, a big machine with flashy lights. A big machine like that has me written all over it. Well, okay, it doesn't. But give me time... and a crayon --11th Doctor