I struggled with this one too. Just never managed to have quite the right combination of check boxes… What’s odd is, you’d think setting it for “Cursor” would do the trick straight away, it’s telling you in the odd error message that your settings are wrong for a cursor texture, but using the Cursor defautl sets the wrong settings.
It will depend what you want to use the texture for. If you don’t need to know what it’s over, the Read/Write setting becomes irrelevant in this contect.