Greenshoe option
Also known as: overallotment option
A greenshoe option, more formally an overallotment option, is a provision that lets sell more shares than the original offering size, typically up to an additional fifteen percent, if investor demand turns out to be especially strong. The option is named after Green Shoe Manufacturing Company, the first issuer to use this structure.
The greenshoe gives a tool to help stabilize the 's price once it starts trading. If demand is strong and the trades above its offering price, can exercise the option, buying the extra shares from the company at the offering price and selling them into the market. If instead the falls below its offering price shortly after the , can choose not to exercise the option and instead buy shares back in the open market to cover their short position, which adds buying pressure right when the needs support.
For investors, a greenshoe option is a normal, expected part of most underwritten rather than a warning sign, and its use in the days after an is one reason a newly public 's price can be less immediately after listing than it might otherwise be.