What is a green shoe option? How does it operate?



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What is a green shoe option? How does it operate?

3 Answer(s)


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A green shoe option is a clause contained in the underwriting agreement of an initial public offering (IPO) that gives the underwriter the right to sell investors more shares than originally planned by the issuer. It typically allow underwriters to sell up to 15% more shares than the original number set by the issuer, if demand conditions warrant such action. This would normally be done if the demand for a security issue proves higher than expected.
A greenshoe option can provide additional price stability to a security issue because the underwriter has the ability to increase supply and smooth out price fluctuations if demand surges.

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Tina is right.

To add on, a green shoe works as an extra bonus to the bankers doing the IPO. If they price the IPO right, the geenshoe gives them some more space to make more money by selling additional shares.

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The Green Shoe Option is a provision contained in an underwriting agreement that gives the Underwriter the right to sell to investors more shares than originally planned by the issuer. The Green Shoe Option provides additional price stability to a security issue because the Underwriter has the ability to increase supply and smooth out price fluctuations if demand surges.

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