Wall Street Secrets Revealed #7 - The Greenshoe Option – Part 2
Last month, I talked about the Greenshoe Option and how it applied to the Lyft IPO,
The Greenshoe option, is an over-allotment, typically allowing underwriters to sell up to 15% more shares than the original amount set by the issuer if demand far exceeds supply.
But the Greenshoe option is really a price stabilizer, to ensure that price doesn’t fall below the IPO price. So if the company’s stock price breaks or falls below the IPO price, the underwriters will buy shares back from the market at the IPO price, which helps to stabilize the price and also removes shares from the market, causing the balance of demand and supply to hopefully reach equilibrium.
However, once all of the oversold shares are bought back and if there is still selling pressure, the underwriters stop the stabilizing process, causing the stock price to break the IPO price. And that’s what happened today with Lyft.
But this shouldn’t be a surprise. Uber and Lyft having similar business models and fighting for the same customer by discounting rides at the their expense. This issue has Wall Street on edge, which is why both IPOs are off to rocky starts. So it shouldn’t be a surprise that the Uber underwriters also used the Greenshoe Option as the Uber stock price sold off on the first day and the following week.
The public debut of the largest ridesharing company, Uber (NYSE:UBER), has not gone well. Widespread investor pessimism over the sustainability of ridesharing economics helped push shares down after going public last Friday, following the IPO pricing at the low range of expectations.
Uber's underwriters were apparently so concerned about the debut that they made a rare move: naked short-selling. CNBC reports that Uber's underwriters decided to use naked short-selling in a futile attempt to prop up shares once they hit the public markets.
Underwriters typically get an option to sell more shares than are included in the initial allotment -- known as a "green shoe" option -- which in effect creates a short position that will need to be subsequently covered by purchasing shares in the open market.
It appears Uber’s stock price has stabilized, for now.
Equity markets are designed to go up. The Greenshoe Option is just another tactical tool Wall Street has to ensure the equity markets function as designed.
This post is my personal opinion. I’m not a financial advisor, this isn't financial advise. Do your own research before making investment decisions.