Green shoe option

What is Green shoe option?

The green shoe option, also called the over-allotment option, is a feature in IPO agreements that helps keep the share price stable after a company goes public. It gives underwriters the ability to sell extra shares (usually up to 15% more than initially planned) if there is strong demand. This helps manage the stock price and ensures there’s enough supply to meet the demand, making the process smoother for both the company and investors.

Key Features of the Green Shoe Option

Price Stabilization: The green shoe option is a method underwriters use to execute buyback shares at the offering price if the price falls below such a price.

Over-allotment: If the demand is higher than expected, underwriters can push up to 15% more of their shares than planned in the first place. This helps meet the extra demand without risking their own money.

How It Works: In case the stock price goes up, after the IPO, underwriters can get more shares at the original price. In the meantime, when the price falls, they can use the market to buy shares and cover their margins thus preventing the price drop.