I'm using a TV. Since the recent MAME video rewrites, this is the order of things I try until I get a good clear (non-blurry) picture with good frame rates:
1) set resolution to 640x480
2) if that produces a tiny image (as you mentioned), disable 'switch resolutions to fit' (sorry I'm using MAME32 and can't remember the actual MAME variable names)
3) if it still doesn't look right, reenable 'switch resolutions to fit', and then try switching from directdraw to direct3D video mode, and unchecking bilinear filtering. Keep resolution on 640x480. (this usually also boosts performance significantly)
I'll check Spy Hunter settings specifically tonight when I get home. Just curious, how do you play this game? Do you have a yoke?