Basically I have followed the links and comments you both supplied and came up with the following solution:

1. Decompress minirt.gz
2. Open init with vim.
3. At the start of mountdata(), use checkbootparam() to check for if the overlay parameter exists
4. If yes, read its value and mount the image as loop on KNOPPIX-DATA using trymount(), outputting a valid message at boot (optional)

Basically the code to mount the overlay image is already there in mountdata(), I just reused it for my purpose.

Now obviously I can tweak init to search if the overlay exists before mounting it, but for now I am satisfied with the output since I managed to do what I had in mind.

Then it is