Solution:

Setting $a=b=0$ gives $2f(0)=2f(0)^2,$ so $f(0)=0$ or $f(0)=1.$ If $f(0)=0,$ then setting $b=0$ forces $f\equiv 0,$ giving $f(1)=0.$ Otherwise $f(0)=1,$ and setting $a=b$ gives $f(2a)=2f(a)^2-1\ge -1$ for every $a.$ In particular, with $a=\tfrac12,$ $f(1)=2f\!\left(\tfrac12\right)^2-1\ge -1.$ So $f(1)\ge -1,$ and indeed every value in $[-1,\infty)$ is attainable (e.g. $f(x)=\cos(kx)$ or $\cosh(kx)$). Hence $-2$ is impossible.

Thus, the correct answer is E.