We say a kite flies in the sky, not on the sky, because sky is treated as a three-dimensional space. Option 3 uses the preposition incorrectly. The other options use on correctly for a page, a street, or the phrasal verb put on.
Note: The original paper flagged this item, possibly because I live on street 10 is also stylistically unusual; however, The kite is flying on the sky remains the clearest grammatical error.