Hello Adobe Users

I am curious-
What is it that determines the size of the overlap area when creating custom DVD menu buttons?

I was assuming the overlap area is actually specified by the canvas size of a .psd but after experimenting I find that reducing the canvas size does NOT reduce the button overlap safe zone.

Here is my situation. I have created a new thin button. I plan to use this button on my sub menu, but the positioning the buttons the "red-frame" overlap area is much taller than the button itself. This is a problem because I need the spacing around these buttons very narrow.

How can I reduce the size my buttons overlap area?
Re-creating this button will be pretty easy, right now that most important factor is that my overlap area is the same size as my actual button