Greenshoe option (over-allotment)

A greenshoe option, formally an over-allotment option, gives the underwriters of an offering the right to buy up to 15% more shares from the issuer (or selling holders) at the offering price, typically within 30 days. It lets underwriters support the stock price after an IPO or follow-on without taking on market risk.

How it works

At pricing, underwriters typically sell 115% of the base deal to investors, creating a short position equal to the extra 15%. What happens next depends on how the stock trades:

• Stock trades above the offer price: underwriters exercise the greenshoe, buying the extra shares from the company at the offer price to cover the short. The company raises more money.
• Stock trades below the offer price: underwriters buy shares in the open market to cover the short, supporting the price. The greenshoe goes partly or entirely unexercised.

The name comes from the Green Shoe Manufacturing Company, which first used the provision in its 1960s offering. Exercise is usually disclosed by press release and reflected in the company's next filing.

Why it matters for traders

The greenshoe means underwriters have a built-in buyer role in the early days of trading, which can cushion declines near the offer price. Once that support is exhausted or the stabilization period ends, the stock trades without it. Full exercise is a sign the deal traded well and adds a modest number of shares. Watch the press release announcing exercise and the final share count.

Example

Hypothetical Northwind Robotics (NWRB) prices a 10 million share IPO at $20 with a 1.5 million share greenshoe. Underwriters allocate 11.5 million shares. The stock trades at $26, so they exercise the full option, and the company raises $230 million instead of $200 million, before fees.

FAQ

Is the greenshoe dilutive?

If exercised with newly issued shares, yes, it adds up to 15% to the shares sold in the deal. If covered in the market, it adds no new shares.

How long do underwriters have to exercise the greenshoe?

Typically up to 30 days after the offering.