Series 79 practice questionhardGreen Shoe Option
A 15 million-share IPO is priced at $45 per share. The underwriters overallot by 2.25 million shares. The stock price falls to $42 post-offering. Which strategy would the syndicate most likely pursue regarding the Green Shoe option?
- AExercise the Green Shoe to purchase shares from the issuer at $45
- BCover their short position by buying shares in the open market below the offering price✓ Correct answer
- CAllow the overallotment to remain uncovered to support the price
- DCancel the overallotment and return shares to the issuer
Explanation
Why B — Cover their short position by buying shares in the open market below the offering price
When the stock trades below the IPO price, underwriters typically buy shares in the open market to cover their short position, supporting the price. Exercising the Green Shoe is preferable only if the stock is above the offering price; otherwise, it is more cost-effective to buy in the market. Not covering the short or canceling the overallotment would expose the syndicate to unnecessary risk.
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