How Regular Greenshoe Option Works
- Regular greenshoe option is a physically settled call option given to the underwriter by the issuer.
- The underwriter has sold 115% of shares and thus is 15% short.
- The IPO price is set at $10 per share.
- If it falls to $8, the underwriter does not exercise the option, instead it buys the shares at $8 in the market to cover his short position at $10. Buying a large block of shares stabilizes the price. The underwriter makes $2.
- If the price rises to $12, the underwriter exercises the option, buying shares from the issuer at $10 and closing his short position at $10.
Read more about this topic: Reverse Greenshoe
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