Thoughts about opt-out clauses?

[Frobby]

It seems like opt-out clauses, once a very rare thing, are starting to become more common. Dan Duquette is on record as being adamantly against them, because it leaves all of the risk on the team, but limits the potential upside. If that is his position, it is going to be difficult to sign players long term when competing against other franchises.

My thoughts are, there should be no hard-and-fast rules. Whether an opt-out clause is a non-starter depends on a number of factors: (1) the price and length of the contract, (2) the extent to which the contract is back-loaded, (3) the injury history of the player, (4) the age of the player, and (5) the timing of the opt-out.

Take Chris Davis for example. Let's say his deal was slightly backloaded, and he wanted an opt-out after three years. Personally, I'd be fine with that, because I'd rather avoid paying him for his age 33-36 seasons anyway. If he thinks he can do better and some other team wants to take that risk, be my guest. I'm happy to take his age 30-32 seasons and move on.

To give Manny Machado an extension with an opt-out right now would be a much riskier proposition with way more downside. If he has any kind of career-altering injury any time in the next three years, you are still stuck with him for the entire period of his extension at a very high price, which could have been avoided if he hadn't been extended; whereas if he stays healthy, it is highly likely he will opt out and your upside will be cut off.

Now does that mean I would not offer Manny an opt-out, if that was the only way to get a deal done? Not necessarily. But it would depend on the amount of the deal and the timing of the opt-out. The later the opt-out, the more palatable it becomes.

FWIW, here's an article from Camden Depot with some thoughts on what an opt-out is worth. http://camdendepot.blogspot.com/2015/12/how-much-is-player-opt-out-worth.html

[FanSince88]

I'm not sure why our FO seems to hate opt-out clauses so much, yes even the ones that are player-only.

If a player exercises an opt-out clause, it must mean that they've played well. If they don't exercise it, we would have been stuck with them anyway without an opt-out clause.

In effect, the player wants to sell themselves high. Maybe that's not such a bad thing. In the case of CD, if he exercises an opt-out clause after 3 years, it must mean he's played very well those first three years, which benefits us. Even better, it lets us off the hook from paying him in his mid-to-late thirties when he will likely decline in production. Plus, it would help us afford a Machado or Schoop extension. I don't really see the downside there.

[FanSince88]

It seems like opt-out clauses, once a very rare thing, are starting to become more common. Dan Duquette is on record as being adamantly against them, because it leaves all of the risk on the team, but limits the potential upside. If that is his position, it is going to be difficult to sign players long term when competing against other franchises.

My thoughts are, there should be no hard-and-fast rules. Whether an opt-out clause is a non-starter depends on a number of factors: (1) the price and length of the contract, (2) the extent to which the contract is back-loaded, (3) the injury history of the player, (4) the age of the player, and (5) the timing of the opt-out.

Take Chris Davis for example. Let's say his deal was slightly backloaded, and he wanted an opt-out after three years. Personally, I'd be fine with that, because I'd rather avoid paying him for his age 33-36 seasons anyway. If he thinks he can do better and some other team wants to take that risk, be my guest. I'm happy to take his age 30-32 seasons and move on.

To give Manny Machado an extension with an opt-out right now would be a much riskier proposition with way more downside. If he has any kind of career-altering injury any time in the next three years, you are still stuck with him for the entire period of his extension at a very high price, which could have been avoided if he hadn't been extended; whereas if he stays healthy, it is highly likely he will opt out and your upside will be cut off.

Now does that mean I would not offer Manny an opt-out, if that was the only way to get a deal done? Not necessarily. But it would depend on the amount of the deal and the timing of the opt-out. The later the opt-out, the more palatable it becomes.

FWIW, here's an article from Camden Depot with some thoughts on what an opt-out is worth. http://camdendepot.blogspot.com/2015/12/how-much-is-player-opt-out-worth.html

OMG you posted this as I was writing a similar post on opt-out clauses. Serendipity, I guess. You got here first, so feel free to merge my thread into this one.

[Phantom]

When a player exercises an opt out clause, it is because he can get more money on the open market. Therefore, to replace his production, you will have to pay more money than you were going to pay him. Are there times when a player opts out, leaves, and then isn't worth his next deal? Sure. But that is like celebrating not signing a Free Agent because he might not live up to the contract.

A player opt out is never good for the team. It is only good for the player.

[FanSince88]

A player opt out is never good for the team. It is only good for the player.

I'm not so sure you can make a blanket statement like that. Think of a player like a stock. It is entirely possible that he can be hugely overvalued when he exercises his opt-out. Yes, you may have to pay more to replace his production, but there is no guarantee he would continue to produce. You'd have the funds freed up to seek out younger and potentially cheaper alternatives.

[thezeroes]

A little further reading from a Business standpoint.

http://www.economist.com/blogs/gametheory/2015/12/contracts-baseball

[FanSince88]

When a player exercises an opt out clause, it is because he can get more money on the open market. Therefore, to replace his production, you will have to pay more money than you were going to pay him. Are there times when a player opts out, leaves, and then isn't worth his next deal? Sure. But that is like celebrating not signing a Free Agent because he might not live up to the contract.

A player opt out is never good for the team. It is only good for the player.

That said, the OP makes a good point -- an opt-out clause for someone like Machado could be pretty damaging if he exercises it when he's 28 or 29. But a mid-thirties player exercising an opt-out? Good riddance.

[FanSince88]

A little further reading from a Business standpoint.

http://www.economist.com/blogs/gametheory/2015/12/contracts-baseball

Great read, thanks for sharing.

"The years following their opt-outs, however, have proven far less rosy for their clubs. Unsurprisingly, the seasons covered by their new contracts but not their old ones have been a debacle: the group averaged just 1.7 WAR per year while still being paid a beefy $20m annually in 2015 dollars, representing a loss for their teams of $9.4m a season. Perhaps even more concerning for potential suitors is that the first part of their new deals?the years for which they would have remained under contract had they not opted out?have also proven disappointing. During those campaigns, they were paid $23.4m a year in 2015 dollars for an average of 2.8 WAR per season, a deficit of $6.2m.

The analytics departments of MLB?s better-informed clubs are well acquainted with this grim track record. And based on the frequency with which opt-outs have been exercised, they are increasingly offering the ?player-friendly? clauses as a means of relieving themselves of the burdensome back ends of long-term contracts. "

[wildcard]

I can see why Dan is against them. With his philosophy they doesn't fit.

Dan believes that his core players are the ones that carry the team. That is where the improvement come from. The FAs that are added are supplementary. He usually does not compete for those players. Rather he wait until January/February when prices are decreasing and picks up bargains like Jimenez and Cruz.

This year is a little different. He did compete for O'Day but had a edge because he knew O'Day wanted to come back with the O's. Davis is another story. Boras gives incumbency no edge. Its will be interesting to see how this plays out.

[waroriole]

They can make sense for a team like us. The majority of the time, the player opts out after providing his greatest value, then goes on to get another huge deal. If you give one to Upton after 3 years, you're likely getting his best performance, then letting some other team pay for his declining years.

If the O's were more forward thinking, and less risk averse, they could take advantage of this. Sadly, it seems like they'll stick their fingers in their ears and scream "can't hear you, can't hear you."

[UMDTerrapins]

In all fairness, with the low compensation these guys are getting lately, it's only fair that they have the opportunity to market their services to someone who will pay them a livable wage.

[weams]

Great read, thanks for sharing.

"The years following their opt-outs, however, have proven far less rosy for their clubs. Unsurprisingly, the seasons covered by their new contracts but not their old ones have been a debacle: the group averaged just 1.7 WAR per year while still being paid a beefy $20m annually in 2015 dollars, representing a loss for their teams of $9.4m a season. Perhaps even more concerning for potential suitors is that the first part of their new deals?the years for which they would have remained under contract had they not opted out?have also proven disappointing. During those campaigns, they were paid $23.4m a year in 2015 dollars for an average of 2.8 WAR per season, a deficit of $6.2m.

The analytics departments of MLB?s better-informed clubs are well acquainted with this grim track record. And based on the frequency with which opt-outs have been exercised, they are increasingly offering the ?player-friendly? clauses as a means of relieving themselves of the burdensome back ends of long-term contracts. "

The next Paragraph...

But six examples is far from an iron-clad sample size. Clubs that are counting on opt-outs to shorten risky deals are assuming that there will always be a greater fool willing to pay a fortune for an ageing star's past performance. Such spendthrifts do still exist in MLB. However, as a greater number of teams implement a quantitatively driven approach, fewer and fewer of them remain in decision-making positions. Whether contracts like Mr Price's and Mr Stanton's turn out to be peaches or lemons depends largely on whether profligate general managers are merely endangered or outright extinct by the time their opt-out clauses come due.

[Phantom]

I'm not so sure you can make a blanket statement like that. Think of a player like a stock. It is entirely possible that he can be hugely overvalued when he exercises his opt-out.

Sure, but like a stock, no one knows an over valued one until after the bottom drops out.

Signing a player to a 7 year deal with a 3 year opt out is saying we either get a bad deal for 7 years or a good deal for 3. I thought the whole point of these giant long term contracts is that you could offset the risk of financial catastrophe by locking up a star long term.

[weams]

“These contracts that have outs, I don’t understand these contracts, because if the players don’t perform well, it’s not like they’re returning huge sums of money they’re getting. If they do well, they’re allowed to become free agents,” Duquette said. “I don’t really understand that type of structure. That type of structure wouldn’t work for the Orioles. I know that.”

http://www.csnmidatlantic.com/blog/orioles-talk/orioles-show-no-interest-offering-opt-outs-free-agent-deals

I guess we will worry about them in 2019.

[Can_of_corn]

When a player exercises an opt out clause, it is because he can get more money on the open market. Therefore, to replace his production, you will have to pay more money than you were going to pay him. Are there times when a player opts out, leaves, and then isn't worth his next deal? Sure. But that is like celebrating not signing a Free Agent because he might not live up to the contract.

A player opt out is never good for the team. It is only good for the player.

If the Yankees had not resigned Arod and Sabathia when they opted out then they would have been in great shape.

I am sure you don't agree but in those two cases the opt out would have worked for the team.

Of course the team has to be prepared to let the player walk and have a good idea what type of production the player will produce.

The Yankees failed the test.