What is an over-allotment option (greenshoe)?

An over-allotment option is an arrangement under which the lead managing underwriter, under an agreement with the issuer, may allocate additional shares of up to 15% of the number of shares offered.

The option is exercised at the offer price within 30 days from the start of trading, and when the managing underwriter buys shares in the market to cover the net short position created by the over-allotment, it must buy at a price of at least 80% of the offer price. It is used as a mechanism to help stabilize the share price in the early period after listing.