Which sentence makes correct use of an apostrophe?

The correct option is the one that identifies sentences making proper use of apostrophes. In English, apostrophes indicate possession or the omission of letters in contractions.

In the first sentence, "The cat chased its tail," the word "its" is a possessive pronoun that denotes ownership or belonging. It is used correctly since possessive pronouns do not require an apostrophe.

In the third sentence, "The cats chased their tails," the phrase 'their' acts similarly to 'its' in showing possession but does not contain an apostrophe as well, confirming its correctness.

The second option, which uses "it's," incorrectly applies the apostrophe; "it's" is a contraction of "it is" or "it has," and does not indicate possession, leading to the incorrect use of the apostrophe in that context.

Thus, both of the sentences that were identified as correct (the first and the third) make appropriate use of possessive forms without the need for an apostrophe.