Definition of Green Shoe Option

Green Shoe Option is an option given to an underwriter of common stock that will allow them to purchase up to an additional 15% of the offering from the issuer at the original offering price to cover over allotments for securities that are in high demand.

Applying "Green Shoe Option" to Securities Exams:

If a syndicate is taking a company public and offering is in high demand the syndicate may need to purchase additional shares from the issuer to cover as much of the demand as they can. The green shoe option or provision may be exercised to cover orders the syndicate has received and will help ensure that the syndicate does not end up with a net short position. Exercising the green shoe option will increase the overall size of the offering and the proceeds to the company.

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