Reverse Greenshoe Option


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.

BREAKING DOWN '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.

  1. Issuer

    A legal entity that develops, registers and sells securities ...
  2. Call Option

    An agreement that gives an investor the right (but not the obligation) ...
  3. Initial Public Offering - IPO

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

    A contractual caveat referring to a period of time after a company ...
  5. Greenshoe Option

    A provision contained in an underwriting agreement that gives ...
  6. Oversubscribed

    A situation in which the demand for an initial public offering ...
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  1. 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 ... Read Full Answer >>
  2. 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. ... Read Full Answer >>
  3. 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 ... Read Full Answer >>
  4. After an initial public offering, does a company profit from increases in its share ...

    The short answer is "no". To understand why, recall that the stock market is actually comprised of two markets - a primary ... Read Full Answer >>
  5. Can mutual funds invest in options and futures?

    Mutual funds invest in not only stocks and fixed-income securities but also options and futures. There exists a separate ... Read Full Answer >>
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