Reverse Greenshoe Option

AAA

DEFINITION of 'Reverse Greenshoe Option'

A provision contained in an public offering underwriting agreement that gives the underwriter the right to sell the issuer shares at a later date. The reverse greenshoe option is used to support the price of a share in the event that after the IPO the demand for the stock falls.

The underwriter would purchase shares for the depressed price in the market, and sell them to the issuer at a higher price by exercising the option. This activity of buying a large amount of shares in the open market is intended to stabilize the price of the stock.

INVESTOPEDIA EXPLAINS 'Reverse Greenshoe Option'

A reverse greenshoe option differs from a regular greenshoe option as they are put and call options respectively.

A reverse greenshoe option is essentially a put option written by the issuer or primary shareholder(s) that allows the underwriter to sell a given percentage of shares issued at a higher price should the market price of the stock fall.

In contrast, a regular greenshoe option is essentially a call option written by the issuer or primary shareholder(s) that allows the underwriter to buy a given percentage of shares issued at a lower price to cover a short position taken during the underwriting. Both methods have the same effect of market price stabilization, however it is believed that the reverse greenshoe option is more practical.

RELATED TERMS
  1. Prospectus

    A formal legal document, which is required by and filed with ...
  2. Lead Underwriter

    A investment bank or other financial outfit that has the primary ...
  3. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  4. Primary Market

    A market that issues new securities on an exchange. Companies, ...
  5. Initial Public Offering - IPO

    The first sale of stock by a private company to the public. IPOs ...
  6. IPO Lock-Up

    A contractual caveat referring to a period of time after a company ...
Related Articles
  1. Investing

    In an IPO, who is a greensheet distributed to and for what purpose?

    One of the most talked about documents that arises in the process of introducing a new issue is the greensheet. This is an internal marketing document prepared by the underwriter and intended ...
  2. Investing

    5 Tips For Investing In IPOs

    Thinking of investing in IPOs? Here are five things to remember before jumping into these murky waters.
  3. Investing

    What happens when a company buys back its shares?

    When a company performs a share buyback, there are a few things that the company can do with the securities they buy back. The company can reissue the stock on the market at a later time. In ...
  4. Options & Futures

    Greenshoe Options: An IPO's Best Friend

    Find out how companies can save or boost their public offering price with these options.
  5. Investing

    How does an IPO get valued? What are some good methods for analyzing IPOs?

    The price of a financial asset traded on the market is set by the forces of supply and demand. Newly issued stocks are no exception to this rule - they sell for whatever price a person is willing ...
  6. Investing

    After an initial public offering, does a company profit from increases in its share price?

    The short answer is "no". To understand why, recall that the stock market is actually comprised of two markets - a primary market and a secondary market.In the primary market, a company issues ...
  7. Retirement

    IPO Basics Tutorial

    What's an IPO, and how did everybody get so rich off them during the dotcom boom? We give you the scoop.
  8. Options & Futures

    Options -- Accessing Stakes In Apple At Less Cost

    Finding Apple stock costly to trade? Here are multiple ways to trade it through low-cost Apple options.
  9. Options & Futures

    These Are The Top Brokerage Firms For Options Trading

    Trading options? Here is the list of the best brokerage firms for options trading, with features, functionality, and brokerage rates.
  10. Investing Basics

    What is the difference between an IPO and a seasoned issue?

    Learn how companies issue IPO securities when they first go public and seasoned issue shares if they sell more shares in the secondary market.

You May Also Like

Hot Definitions
  1. Commercial Paper

    An unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable, inventories ...
  2. Federal Funds Rate

    The interest rate at which a depository institution lends funds maintained at the Federal Reserve to another depository institution ...
  3. Fixed Asset

    A long-term tangible piece of property that a firm owns and uses in the production of its income and is not expected to be ...
  4. Break-Even Analysis

    An analysis to determine the point at which revenue received equals the costs associated with receiving the revenue. Break-even ...
  5. Key Performance Indicators - KPI

    A set of quantifiable measures that a company or industry uses to gauge or compare performance in terms of meeting their ...
  6. Bank Guarantee

    A guarantee from a lending institution ensuring that the liabilities of a debtor will be met. In other words, if the debtor ...
Trading Center