Overlay as it relates to poker has a couple of meanings. If a tournament has a guaranteed prize pool, the tournament does not get the required number of participants to reach or go over that pool, yet the tournament still happens (with the host taking a loss), that extra money promised by the guarantee in the pool is considered the overlay.
Overlay also means the extra money put in the pot usually from a player whom you don’t expect to be able to continue in the hand. Let’s clarify the concept of overlay with another example.
Let’s say you’re playing in an online tournament where you start with 3000 chips. A player opens to 800 preflop and another player moves all in for 3000. You have a stack of 3000 chips and wake up to AsKd. Let’s assume the all in player wouldn’t shove AQ or AJ because the original raiser was in fairly early position. It’s also less likely the all in player has AA or KK due to the fact that you’re holding one of each of those cards. That means the most likely scenario is he’s holding 77-QQ, starting hands you’re a little under 50 percent to win against. Lots of players might fold AK to an all in bet when they put their opponent on a pocket pair because they know they are mathematically behind. However – there’s overlay. For the sake of this explanation we will assume the initial raiser won’t call unless he has pocket Aces or Kings since he’ll be facing TWO all in bets by the time the action gets back to him. So if we assume he is folding, you will get to play your 3000 chips for the 3000 (all-in player) PLUS the 800 (initial raiser) + the blinds and antes if applicable. The 800 chips left in the pot if the initial raiser folds plus the blinds and antes would be the overlay. This extra value in the pot would be what could make it mathematically right to go all in even knowing you are a slight underdog to the all in player.
Let’s say we put our all in opponent squarely on pocket Queens. AK off suit is going to be about 44 percent to win against pocket Queens all in preflop. This means if you went all in for 3000 for a chance to win 4100 3000(QQ’s chip stack) + 800(initial raiser’s money) + 100(small blind) + 200(big blind), you would win the pot 44 percent of the time and lose it about 56 percent of the time. If you multiply the total pot of 7100 by 44% (our chance of winning), it yields an estimated chip return of 3124. This is obviously higher than what you would be left with had you simply folded with nothing invested. Is it worth risking your tournament for a 124 chip gain? That’s an entirely different post but what you have learned today is how to calculate your overlay and that it can be right to go all in even when you know you’re an underdog.