What would be the best thing to do here?

Customer placed an order on Thursday. On Friday it was dropped off at USPS. On Saturday the customer wants a refund because “they ordered it by mistake”.

Would it be best to tell them that they are SOL due to it being shipped out already?

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This often happens to most sellers.

Just say sorry, the order has already been shipped but they can return it for a refund when received.

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You would simply tell buyer that order is already shipped and can’t be canceled. However, they can return it once received. Unfortunately, seller will be at loss as Amazon is buyer centric and they will not ask any questions from buyer as to why they want to return the item and seller will have to bear the loss because Amazon returns a very small portion of referral fee commission which they charge to sellers.