Acronym came about upon the release of Halo 3. Hidden Skulls can be collected during the campaign, which unlock toggleable difficulty options before starting a level, such as no hud enemies have twice the health, throw grenades more often, etc. LASO refers to when someone plays through a level or the campaign on Legendary mode (the toughest difficulty setting) in addition to having all of the Skulls turned on. A grueling and many times insurmountable challenge.
This acronym can also be used as a generic video gaming term, meaning to play through the game on the hardest difficulty, while applying self imposed rules that handicap the player character's effectiveness in combat. Ex: I may only use the lowest class of weapons, no grenades, avoid EXP gain at all possible, etc.
Guy2: Oh he's stuck in his room, trying to complete a LASO challenge vid for YouTube. Poor kid.