Where can I find this option?
Head to the Conversations section, then select the Mentions sub-tab (for Instagram profiles only). Here you'll find all unread mentions, and you can use the filter to switch between All mentions, Mentions in Captions, or Mentions in Comments.
Click the "Reply" button to respond to a comment, or click on a media thumbnail to open up the Media Viewer where you can see (and reply to) all mentions related to that post.
You can also reply to posts directly from the Mentions tab or from the Tags and Mentions feed! Just click on a media thumbnail to open up the media viewer, and you'll find the "Reply" button underneath any of your mentions in comments, and the "Say something" option on media in which you're mentioned in the caption.
Due to Instagram API limitations, it's not possible to reply to/comment on posts in which you've been tagged, only posts where you've been @ mentioned in the caption or comment of the post.