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Definition: Green Shoe Option
Green shoe option in an IPO indicates a clause in the agreement stating that the underwriting authorities can sell extra shares to its investors even though there was a specific number of shares that was allotted by the company initially.
The maximum quantity of shares that can be usually sold is around 15% and this happens in cases when the demand for the shares in the market is greater than the supply and the stock trades are above the offering price.
This option provides additional price stability since the company can increase the number of shares being offered in case the demand increases thus smoothening the price fluctuations.