In earlier versions of FPC, this switch was recognised for Turbo Pascal compatibility, but was otherwise ignored: The concept of overlay code is not needed in 32-bit or 64-bit programs.
In newer versions of FPC (certainly as of 2.0.0), this switch became a Delphi compatible switch: it has the same meaning as the {$OPTMIZATIONS ON/OFF} switch, switching on or off level 2 optimizations.
See section 1.2.58 on page 143 for more explanations and more detailed optimization settings.