Greenshoe Option Law and Legal Definition

A green shoe option is a clause contained in the underwriting agreement of an initial public offering (IPO). It is also known as an over-allotment provision. It allows the underwriting syndicate the right to sell investors more shares than originally planned by the issuer. This would normally be done if the demand for a security issue proves higher than expected. Greenshoe options typically allow underwriters to sell up to fifteen percent more shares than the original number set by the issuer, if demand conditions warrant such action. As the underwriter has the ability to increase supply if demand is higher than expected, a greenshoe option can create price stability during an IPO.