What is a Greenshoe Option?

What is a Greenshoe Option?

Tim Skeet

35 years: Debt capital markets

During an IPO, greenshoe options give underwriters the facility to acquire more shares to try and stabilise the stock price after initial trading. Tim explains the details around how these work and why they are necessary.

During an IPO, greenshoe options give underwriters the facility to acquire more shares to try and stabilise the stock price after initial trading. Tim explains the details around how these work and why they are necessary.

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What is a Greenshoe Option?

4 mins 28 secs

Overview

A greenshoe option is a mechanism specified in a prospectus or offering document during an initial public offering. The purpose is to ensure that a broker-dealer can stabilise the stock price by purchasing additional shares from the issuer in the event the price of over-alloted shares go up.

Key learning objectives:

  • Define a greenshoe option

  • Explain how a greenshoe option works

  • Describe an event when a greenshoe option is necessary

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Summary
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