UrbanPro
true

Learn Stock Market Investing from the Best Tutors

  • Affordable fees
  • 1-1 or Group class
  • Flexible Timings
  • Verified Tutors

Green Shoe Option

Prathuish G
11/02/2017 0 0

On hope that you are comfortable with the terms

  • IPO
  • Options
  • Underwriters
  • Follow-on
  • Shorting

Green shoe option is a method of over allotment option, embedded in the IPO. An explanation regarding the practical use would give a better picture.

Story Line (Naive Definitions)

  • X owns a company ,he is going for his first IPO
  • X fears that prices may go far below the offer price once trading started on the equity in Capital market
  • This situation can lead investors to off load investments ,bring price down uncontrollably
  • So he approaches his underwriter and tells that he want to cover that risk
  • Underwriter provides him with the offer of Green shoe option

Now, you are clear about the risk of X regarding price & investor behavior, let’s call this risk ‘K’, this risk will be covered by Underwriters. But they don’t do it without covering their exposure to risk.

Now lets’ see how they operate under the norms of Green Shoe Option.

  • To manage K ,they adopted Green Shoe Option in IPO
  • This would give underwriters the power to short sell a portion of stocks above the actual issue planned (Usually 15%,can vary)
  • So Underwriters in IPO sells 115% shares ,instead of 100% planned (if without Green Shoe Option )

Now let’s analyze the market standing of IPO after issue .

Shares Out standing

  • 100% Long Positions - Regular Investors
  • 15% Short Positions - Under writers

Once shares are started trading two things can happen in IPO in general

Share prices

  • Go Up
  • or
  • Go Down

When Share price Go Down

Risk situation expected by X, underwriters manages the risk by buying shares at Market price or Offer price which is pre-planned; this gives a better support level in stabilizing stock price, and helps to churn out unusual sell off.

When Share Price Go Up

Risk K ,not taking place would put the underwriters in bad position to buy back the shares from market at Market Price or above offer price ,which would compromise their cash position.

So they execute Green Shoe Option, which helps them to buy shares from company at offer price. Hence it helps them closing their short positions without any further adjustment to the existing cash position.

0 Dislike
Follow 0

Please Enter a comment

Submit

Other Lessons for You

Technical Analysis
Technical analysis involves I. Market activity II. Past prices III. Volume It is a statistical method used to find a pattern and predict future movements based on previous market data. Concepts...

Is Trading A Difficult Task ?
It's as easy as other businesses and as tricky as other businesses. It depends on your excellent planning, mental stability, research, sound judgement, and most importantly, risk management. The blunder...

What do you mean by Derivative market?
(Derivatives)A derivative is a security with a price that is dependent upon or derived from one or more underlying assets. The derivative itself is a contract between two or more parties based upon the...

Intraday Trading - My way of doing it
Who I am Right now is " I am a Greedy person, compulsive trader, proving person, manipulator, Independent, non acceptor, not touch with reality, ready to book losses saying it is normal to book losses-...

What is Demat Account ? How we can open.
Demat Account : - Demat a/c is like a bank account we can keep securities in it rather than money. If we calssify the demat we will find 2 portion : 1. Trading a/c : Where we can keep cash only 2....
X

Looking for Stock Market Investing Classes?

The best tutors for Stock Market Investing Classes are on UrbanPro

  • Select the best Tutor
  • Book & Attend a Free Demo
  • Pay and start Learning

Learn Stock Market Investing with the Best Tutors

The best Tutors for Stock Market Investing Classes are on UrbanPro

This website uses cookies

We use cookies to improve user experience. Choose what cookies you allow us to use. You can read more about our Cookie Policy in our Privacy Policy

Accept All
Decline All

UrbanPro.com is India's largest network of most trusted tutors and institutes. Over 55 lakh students rely on UrbanPro.com, to fulfill their learning requirements across 1,000+ categories. Using UrbanPro.com, parents, and students can compare multiple Tutors and Institutes and choose the one that best suits their requirements. More than 7.5 lakh verified Tutors and Institutes are helping millions of students every day and growing their tutoring business on UrbanPro.com. Whether you are looking for a tutor to learn mathematics, a German language trainer to brush up your German language skills or an institute to upgrade your IT skills, we have got the best selection of Tutors and Training Institutes for you. Read more