How to generate a styled image with out actually creating it?
The only way would be to use CSS and put a div with a background transparent image of the watermark overlay on top of the actual image using the z-index: attribute.

You would risk that people could inspect element or view page source and find the direct link to the image, or use a tool to strip all css and then save the image.

For total security, I'm pretty sure there is no other way than having the watermark on the image itself.