If you select "p" you'll get your Overlay within a separate partition "/dev/sda2" with the mountpoint "KNOPPIX-DATA"
flash-knoppix2..png

This partition is ReiserFS formatted; therefore the overlay size can exceed the size of 4GB. The partition "/dev/sda1" is FAT32 formatted as usual.

In my example I've used an USB-drive of about 150GB and I created an overlay partition of 20GB.

As you can see there is remainig free space at '/mnt-system/' of 126GB which also can be used. For example create the folder

'/mnt-system/personal_stuff/'

and store whatever you want within this folder.