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Running the Opt Out

The Hardball Times’ Dave Studeman took issue with my take on CC Sabathia’s opt-out clause:

Jay Jaffe responds to Keith Law’s opinion about opt-out clauses, saying that he doesn’t think they’re a bad idea. Let’s be clear about this: opt-out clauses increase the cost of a contract to a club. Depending on the player, they could cost a lot.

Let’s take CC Sabathia, who can reportedly opt out of his new seven-year Yankee deal after three years. Two basic things can happen: Sabathia can go downhill and decide to continue playing under the contract because he’s overpaid compared to the “market” (bad for the Yankees) or he can continue to pitch well and the market for free agent pitchers can become even more expensive than it is now. In that case, he’ll opt out of the contract and the Yankees will have to replace him at the now-higher free agent rate (bad for Yankees).

Opt-out clauses impact the value of options in the financial market and the impact the value of contracts in baseball. For CC, that impact is positive. For the Yankees, it’s definitely negative.

Dave misconstrued some of what I had to say, so I responded via email:

[Y]ou’ve overstated my case regarding opt-outs; it’s not that “he doesn’t think they’re a bad idea.” It’s that I don’t think this particular one is a bad idea because of the way it could get the Yanks out of the back end of their deal after getting the more palatable portion of CC’s services.

Functionally there’s really no penalty for the Yanks in him going downhill and not opting out in year 3, because that’s what 99% of all long-term MLB contracts are anyway — guarantees that offer no leeway for such circumstances anyway. That’s not to say 7/$161M contracts are a good idea by any stretch, but it’s money the Yankees have already decided they need to spend to get the player. It’s a sunk cost, and anything they get back from that is a bonus — even if it costs more to replace him, they can spend it on a younger player with a lower injury risk, or on an area where they have more need circa 2011. They also get the draft picks at a time when he’s more likely to be a Type A, with zero incentive to accept arbitration.

It’s impossible to project pitchers very far into the future; if I get the next three years of prime CC but there’s a chance I get off the hook for his Age 32-35 seasons once I’ve ridden him for 700 more innings, I’m not sure I complain. And if I’m stuck with him for those years because I misjudged how well he might hold up over the first three, I’ve got no right to complain.

Back in Dave’s court, via email:

I didn’t mean to overstate your case — I guess I was confused because you also referred to other opt out clauses in the same paragraph. I thought you were making a judgment about opt out clauses in general.

I understand your argument but hey, I disagree. :) The opt out clause lets the Yankees get out of the back end only if it looks like it will be a good deal for them. They will stay in it if it looks like a bad deal for them. That’s taking the risk without keeping the reward. It’s basic finance, and not a good idea.

Thinking about this particular one, I disagree even more. The Yankees like to sign stars, and they pay more per talent than any other team in baseball. So if CC walks, that means that other teams are willing to pay even more than the Yankees are on the hook for — which means the Yankees are losing out even more, based on their terms.

The compensation choices are a good point, but they don’t offset the general argument to me (though I might be undervaluing them). Particularly for a team like the Yankees, which focuses on the “present value” of success. Sometimes the agents negotiate arbitration offers out of the contract in those situations — do we know those details yet?

So far as I know, no further details about the fine print on the contract or the opt-out clause have emerged, but the breakdown suggests that the salary remains a flat $23 million a year across the life of the deal, which to me telegraphs Sabathia’s intention to opt out because to stay in would mean he doesn’t expect his value to increase at all over that period, or even over the shorter increment.

The other factor in this is Sabathia’s stated desire to play in California. Let’s face it, seven years is a long time to commit to a new place, and if Sabathia is unhappy enough to want out of New York at some point, a standard guaranteed contract makes it highly unlikely the Yankees could move him for much value without eating a ton of salary; having the money and the draft picks is probably preferable. Newsday’s Ken Davidoff, for one, agrees that it’s quite possible CC walks just to get the chance to play in California:

While this technically is a seven-year, $161-million deal, it’s spiritually three years for $69 million. Is there any doubt Sabathia will use that opt-out after 2011? In signing this deal, he has sent a telegram to the Giants: “You have three years to get your house in order for my arrival! See you then!”

Back to what Dave wrote, I don’t think the Yanks “are losing out even more, based on their terms” because they’re always going to find something they value more than what they have just as surely as God made little green apples, and having the inconvenience of a current payroll obligation disappear works to their advantage. I also think that if Sabathia stays in the deal despite being unproductive and/or unhappy in New York, the final four years of his contract might wind up being a miserable experience that could destroy his market value once the full term of the contract runs, so I see him as that much more likely to exercise the opt-out barring a year-three arm injury.

Anyway, Dave and I appear to be at the point of agreeing to disagree, and while I realize I’m probably in the minority here, I’ve got a bit of company in my foxhole in Joe Sheehan. While the two of us sparred when it came to our views about the real risks Sabathia’s unique physique carries with regards to the long-term deal, we both like the theoretical goal of the Yankees lowering their exposure to the back end of the deal by any means necessary:

One more time: I agree with everything Keith [Law] said. In *this* case, however, I see Sabathia as such a long-term risk that I don’t want his 32-35 years, even if he pitches well enough to make the opt-out a good idea. I would happily take the three good seasons and let him walk, even if the last four years of the contract looked reasonable come November 2011.

At the end of the day, none of this settles the argument, but it makes for an interesting debate. Time will tell, of course, whether the gambit pays off. The bet here is that it will, even if Sabathia leaves after three years.

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