used as more of a joke than a question in most cases. It originated from an internet meme The orly owl and was carried off into various slang and/or leetspeak (1337).
A good example of where this term may be used is the popular website, 4chan (since most internet memes were basically generated from 4chan).
The usual response to this phrase is Yarly or Ya rly.
Person two: Orly nao?
Person one: Yarly.