Final answer:
An inline object in document formatting is an image or object positioned in the text flow at the insertion point, much like a character in a sentence.
Step-by-step explanation:
An inline object in a document refers to option 3: A picture or object that is positioned directly in the text at the insertion point just like a character in a sentence. This means that the object, such as an image or a shape, is treated as part of the text itself and will flow with it. For example, as you type and the text adjusts, the inline object moves along with the words, much like how a character would. This contrasts with objects that are set to 'float,' where they can be positioned independently from the text, often with text wrapping around them.