A provision in an initial public offering (IPO) underwriting agreement which entitles the underwriters to purchase more shares than specified in a deal in order to stabilize the share price after a deal commences trading in the secondary market. The issuer, in turn, agrees to sell additional shares to the underwriters at the offering price for a prespecified period of time. For example, an over-allotment option might allow an underwriter to purchase 15% more shares, if necessary. The option can be exercised by the underwriter at the discretion of the bookrunner within 30 days of the offering. Over-allotment options can include both primary shares and secondary shares.
An over-allotment option is also known as a green shoe.
