Greenshoe option

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Greenshoe option

 Option that allows the underwriter for a new issue to increase the size of the issue because of high demand for the shares.

Greenshoe Option

A provision in some underwriting contracts allowing the underwriter to sell more shares to investors than were originally agreed. In an underwriting agreement, the underwriter agrees with the issuer of a security to place a certain amount with investors. If demand for the security exceeds the underwriter's supply, the greenshoe option allows the underwriter to avoid a sudden jump in price by increasing supply. Normally, the greenshoe option allows the underwriter to increase supply up to 15%. It is important to note that not all underwriting contracts have greenshoe options, especially in situations in which the issue is for a limited project for which the issuer only needs a certain amount of capital. It is also called an overallotment option.