As is the case with other gambling terms, overlay can have multiple meanings, depending on the context and the game being played.
Generally speaking, the term overlay refers to odds that benefit the player more than they benefit the house. For example, if players find themselves in a favourable position and have odds that are better than they should be, those odds are called overlay odds.
However, if you are playing poker, the term overlay may be used to refer to the extra money added to the prize pool by the poker room operator and a prize pool that exceeds the sum of all buy-ins.
Either way, the term generally refers to a situation where the player is in a good position and has an edge over the casino.