Definition of Greenshoe option:
A greenshoe option is an over-allotment option. In the context of an initial public offering (IPO), it is a provision in an underwriting agreement that grants the underwriter the right to sell investors more shares than initially planned by the issuer if the demand for a security issue proves higher than expected.
Over-allotment options are known as greenshoe options because, in 1919, Green Shoe Manufacturing Company (now part of Wolverine World Wide, Inc. (WWW) was the first to issue this type of option. A greenshoe option provides additional price stability to a security issue because the underwriter can increase supply and smooth out price fluctuations. It is the only type of price stabilization measure permitted by the Securities and Exchange Commission (SEC).
The ability for a stockbroker to offer more stocks to clients even though the original stock issue had a specific amount of shares to be sold.
How to use Greenshoe option in a sentence?
- Greenshoe options provide buying power to cover short positions if prices fall, without the risk of having to buy shares if the price rises. .
- Greenshoe options typically allow underwriters to sell up to 15% more shares than the original issue amount.
- A greenshoe option was first used by the Green Shoe Manufacturing Company (now part of Wolverine World Wide, Inc.).
- Greenshoe options provide price stability and liquidity.
- A greenshoe option is an over-allotment option in the context of an IPO.
Meaning of Greenshoe option & Greenshoe option Definition