The example sentence should read:
Mr. Peat, who is a teacher at my school, does great magic tricks.
We usually use relative clauses to give additional details about something without starting a new sentence. In this case, the original sentence consists of the following clauses:
Mr. Peat does great magic tricks
Mr. Peat is a teacher at my school.
Since the original example sentence uses the relative pronoun who, we know that the additional information that is given is about the person in the sentence, hence the clause should be right next to Mr. Peat. This explains why option D is your best answer.
