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<blockquote data-quote="Andreasyau1" data-source="post: 16706" data-attributes="member: 600">The goal of the underwriters is to sell the shares as close to the offer price as possible and avoid price volatility for the issuing company. Let's say that (x) = size of the share offering.Underwriters are allowed to sell an additional allocation (y) of the offering size. If they see that investor demand is high, they will sell (x + y) to the market. Because the underwriters do not have y, they are shorting the stock and would need to cover their short positions.Scenario A: share price trades above the offer price because the demand &gt; supply. Underwriters would want to bring the price down to the offer price. Therefore, they exercise the Greenshoe option, which is to buy 15% more shares at the offer price from the issuing company. By selling this 15%, they can prop up supply in the market and bring the price down and 'stabilize' it.Scenario B: share price trades below offer price because the demand &lt; supply. Underwriters would NOT exercise the Greenshoe option. Rather, they would buy back (y) from the market to decrease the supply of shares relative to the demand. This would bring the price back up and 'stabilize it'.</blockquote>

[QUOTE="Andreasyau1, post: 16706, member: 600"] The goal of the underwriters is to sell the shares as close to the offer price as possible and avoid price volatility for the issuing company. Let's say that (x) = size of the share offering. Underwriters are allowed to sell an additional allocation (y) of the offering size. If they see that investor demand is high, they will sell (x + y) to the market. Because the underwriters do not have y, they are shorting the stock and would need to cover their short positions. Scenario A: share price trades above the offer price because the demand > supply. Underwriters would want to bring the price down to the offer price. Therefore, they exercise the Greenshoe option, which is to buy 15% more shares at the offer price from the issuing company. By selling this 15%, they can prop up supply in the market and bring the price down and 'stabilize' it. Scenario B: share price trades below offer price because the demand < supply. Underwriters would NOT exercise the Greenshoe option. Rather, they would buy back (y) from the market to decrease the supply of shares relative to the demand. This would bring the price back up and 'stabilize it'. [/QUOTE]

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