Greenshoe
Capital MarketsAn option letting underwriters sell up to 15% more shares than the base deal and buy them back if the price falls.
Also written: over allotment option
The greenshoe, formally the over allotment option, allows underwriters to allocate more shares than the base offering, typically up to 15%, creating a short position they can cover in one of two ways.
If the shares trade up, they exercise the option and buy the extra shares from the company or selling shareholders at the offer price, so the deal simply prints larger.
If the shares trade down, they buy in the market instead, which supports the price and closes their short at a profit that offsets the stabilisation. This is legitimate, disclosed price stabilisation rather than manipulation.
Its existence is why a well handled IPO rarely collapses on day one, and why the final deal size is not known until the stabilisation period, usually 30 days, has ended.
Worked example
A base deal of 20 million shares at €18.00 raises 360. The greenshoe allows a further 15%, so 3 million shares.
Underwriters allocate 23 million, leaving themselves short 3 million. If the stock trades above €18.00 they exercise the option and buy those shares from the issuer, so the deal prints at 414.
If it trades to €17.00 they instead buy 3 million in the market, supporting the price and closing the short at a 3 gain that offsets the stabilisation.
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