I'm not sure which version you are using. 1.8, or something older? The BUG options folder is supposed to be created by the DW installer. Can you please find your folder (My Documents)/My Games/Beyond the Sword, and confirm if it has a Dune Wars directory inside it? Inside the Dune Wars directory should be a UserSettings directory with a whole bunch of ini files inside. If you don't have those files, there is some installer problem.
If running the current installer doesn't create them for you, please manually create the Dune Wars/UserSettings directory; don't worry about creating the ini files, the game should at least stop complaining about the bug options directory.