Step 1: Positions at 3:40.
Minute hand: $6 \times 40 = 240^\circ$.
Hour hand: $30 \times 3 + 0.5 \times 40 = 90 + 20 = 110^\circ$.
Step 2: Difference between hands.
$|240^\circ - 110^\circ| = 130^\circ$.
Step 3: Choose smaller angle.
The clock’s full circle is $360^\circ$, so the smaller angle is:
$\min(130^\circ,\ 360^\circ - 130^\circ) = 130^\circ$.
Wait—this gives $130^\circ$, but we need to check:
Since 3:40 places the minute hand well past the half-circle from the hour hand, the smaller angle indeed is $130^\circ$. This matches Option (c).
However, if the problem defines the “angle” as the acute angle, we use $130^\circ$.
Correction: My earlier quick check showed $130^\circ$, so the correct answer is Option (c), not $125^\circ$.
\[
\boxed{130^\circ\ \text{(Option (c)}}
\]