This application provides a packet transmission method, an apparatus, and a system in an overlay network. Network address translation and reverse network address translation are implemented at a demarcation point: an IP tunnel end point, between the logical network and the physical network, an IP option is expanded to carry a source-end network element identifier and a destination-end network element identifier, and a virtual machine in an upper-layer logical network is interconnected with a peer-end virtual machine through a lower-layer physical network by using an IP tunnel.