Reverse greenshoe

A reverse greenshoe is a special provision in an IPO prospectus, which allows underwriters to sell shares back to the issuer. If a 'regular' greenshoe is, in fact, a call option written by the issuer for the underwriters, a reverse greenshoe is a put option.

Reverse greenshoe has exactly the same effect on the share price as a traditional option but is structured differently. It is used to support the share price in the event that the share price falls in the post-IPO aftermarket. In this case, the underwriter buys shares in the open market and then sells them back to the issuer, stabilizing the share price.

In certain circumstances, a reverse greenshoe can be a more practical form of price stabilisation than the traditional method.

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 (minus the underwriting discount) and closing out his short position.

How reverse greenshoe option works
  • Reverse greenshoe option is a put option for a given amount of shares (15% of the issued amount, for example) held by the underwriter "against" the issuer (if a primary offering) or against the majority shareholder/s (if a secondary offering).
  • The underwriter sells 100% of the issued stock.
  • The IPO price is set at $10 per share.
  • If it falls to $8, the underwriter purchases X number of shares in the market and then exercises the option, buying the shares at $8 in the market and selling back to the issuer at $10. Buying a large block of shares stabilizes the price.
  • If the price rises to $12, the underwriter neither purchases stock nor exercises the option.
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