CO stands for Character Optimization.
This is a character design philosophy where the player selects optimal choices to accomplish a specific concept. It is commonly abbreviated as CO or CharOp.
For example, a warrior would select options that make them more effective in combat, such as weapon and fighting style training; while a political or social leader would select options that make them more influential, such as social contacts, perform public works that appeal to voters, a more pleasing physical appearance and so forth.
This philosophy sometimes has a negative connotation, also referred to as min-maxing, wherein the player maximizes the character strengths and minimizes the character weakness to an extreme.
Character Optimization is viewed especially negatively by some in the role playing community when the character choices do not reflect the events and options currently available based on the current story, or are made without any consideration for the character's background or personality or the group dynamics.
Such extreme optimizations can be a source of contention or disagreement within groups, though many games actually subtly encourage such by the design choices of the game designers.
Others find such design challenges enjoyable, and view it as successfully mimicking heroes from popular media, many of which cannot be built or emulated within the context of a given game without such optimizations.
It is also considered a hallmark of skill and mastery of a given game system. Wise storytellers and gamemasters learn about what optimizations exist in their game of choice in advance, so that they can make informed choices regarding such optimizations.
Oddly enough, CO is considered normal, even required, in a console or video or computer game based rpg.
TO stands for Theoretical Optimization
This is a design philosophy akin to crashing a car into a wall to see what happens. It is intended to be more of a game testing method, rather than a proper character design philosophy. It is commonly abbreviated as TO.
TO tests the limits of what a given game allows, not only extensively testing what can be done by the rules... but also taking advantage of poor design, loopholes, unintended grammatical meanings, poor word choice, or non-playtested combinations of rules, especially from multiple source books.
Theoretical Optimization frequently results in the discovery of infinite loops, near infinite loops, character stat and ability numerical values which are far in excess of what is considered acceptable or standard, and various exploits which allow access to abilities or effects much sooner than intended or designed.
The poor reputation this otherwise valuable and necessary game design method has, stems from a minority of players who try to use, or force the allowance of, these theoretical optimization results in actual gameplay.