Its origin is "Laughing out Loud". But it has become so overused that it's scarcely expressing humour anymore. Todays meaning is more like "OMG that is so lame!"
Person 1: You want to come over and watch Clueless?
Person 2: lol
Two people are walking on the street, talking. A guy in a spotted Hawaii-shirt passes by. The two friends: lol!