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Tuesday, March 13, 2018

The Opt-Out Clause Is Evolving | FanGraphs Baseball

Jeff Sullivan explains Jake Arrieta’s contract.

Jim Furtado Posted: March 13, 2018 at 04:20 PM | 5 comment(s) Login to Bookmark
  Tags: contracrs, jake arrieta

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   1. Walt Davis Posted: March 13, 2018 at 05:30 PM (#5637504)
Technically, contracts similar to this were seen around 2000 as "mutual" options (or maybe they were called "dual" options). I recall the Cubs had one with Ricky Gutierrez. The Cubs held a team option at, say, $6 M ... if they declined it then Gutierrez had an option at $4 M. In this case, the Phils have an option that runs at 3/$60-80 which, if they decline, Arrieta can exercise his option at 1/$20. (Or maybe the decisions go in reverse order ... maybe they did with Gutierrez too ... I don't think it makes much difference who makes the first decision.)

The Arrieta contract also lies somewhere "above" (from the team's perspective) but has some similarity to a contract where the Phils hold a 3/$60-80 option with a $20 M buyout. Obviously this is less onerous to the Phils since the only way Arrieta gets the $20 is to play for them in 2020 ... but of course the most likely reason that would happen is if Arrieta is hurt so in reality it likely will operate close to a contract with a huge buyout. We don't see many of those but I believe Howard's contract had an option with a $10 M buyout and Lester's vesting option has a buyout of $10 M (if not vested).
   2. 6 - 4 - 3 Posted: March 14, 2018 at 05:33 AM (#5637684)
The value of the opt out and the option to extend is driven by the likelihood of that happening. If you use backward induction, then it's pretty clear that the likelihood is virtually zero.

Say Arrieta triggers the opt out. That means that his production in 2018-19 was much better than expected, which likely means he's activate the escalators to bring his Year 4 and 5 salaries to $25M or $30M. At that point, he's looking at $60-80M over 3 years ($20M in Year 3, $20-30M in Years 4 and 5) for his age 34-36 seasons. It's really hard to imagine a scenario in which that is appealing to the Phillies, but for the sake of argument say that they do.

Now moving back a step on the decision tree, Arrieta will have a pretty good idea of whether the Phillies will exercise their option (as well as precisely what his salaries would be). If the Phillies are likely to exercise it, then he has to evaluate whether he's better off pitching Year 3 and entering the free agent market as a 35 year-old. If he's pitched well enough where exercise of the Phillies option is likely, then it's possible that he'll secure a greater guarantee. Based on how he acted over the past year or so, it's clear that he's not risk averse and is willing to bet on himself (i.e., turn in another great year in Year 3) and take his chances on the free agent market again. That is, he won't exercise his opt out if he believes that the Phillies will exercise their option to extend him another two years at $20-30M.

To recap, we're basically in a Catch 22: either Arrieta pitches so well where premature free agency is appealing or he does not. But if the former, then the Phillies likely preempt that effort. So if Arrieta's goal is to reach free agency a second time as soon as possible, he's better off not opting out.

Finally, because the probability of the opt out is incredibly low, it's virtually worthless. So despite the atypical contract language gymnastics, we're basically left with $75M/3yrs whose most interesting feature is that it's front-loaded. Solid contract for both sides, but it's really not a model that's worth emulating by future free agents since the same conundrum will apply in their cases as well.
   3. villageidiom Posted: March 14, 2018 at 08:46 AM (#5637696)
That is, he won't exercise his opt out if he believes that the Phillies will exercise their option to extend him another two years at $20-30M.
My understanding was that the Phillies' option doesn't reverse an opt-out as much as it voids it. That is, they have the first move. He can only opt out if they don't void it first.

The decision tree is this.

1. Would the Phillies want to extend him?

1a. Is he healthy?
- NOT HEALTHY: No; go to 2.
- HEALTHY: Go to 1a1.

1a1. Is he productive?
- VERY PRODUCTIVE (CYA candidate 2018-19): Extension would be $60m for 2 years. Very productive, healthy, $30m/yr? YES.
- SOMEWHAT PRODUCTIVE (a few WAR per year): Extension would be $50m for 2 years. YES.
- NOT PRODUCTIVE (low/no WAR): Extension would be $50m for 2 years. No; go to 2.

2. If the Phillies don't extend him, would he decline to opt out?
- NOT HEALTHY: YES. He gets one more year under contract to get healthy.
- HEALTHY, NOT PRODUCTIVE: YES. He gets one more year under contract to improve his value before free agency.

I phrased all the decisions in such a way that a YES means he stays with the Phillies. It really comes down to whether the Phillies will decide to extend him or he'll just have a 3-year contract. The circumstances by which they don't void the opt-out, but he opts out anyway, are very unlikely.
   4. Nasty Nate Posted: March 14, 2018 at 09:35 AM (#5637709)
My understanding was that the Phillies' option doesn't reverse an opt-out as much as it voids it. That is, they have the first move. He can only opt out if they don't void it first.
The reporting on this is ambiguous. I assumed Arrieta would have the first move.
   5. Walt Davis Posted: March 14, 2018 at 04:06 PM (#5638035)
The Phils' decision on the option will also hinge on how well they have developed as a team. They're not yet contenders, they don't have any can't miss prospects. They could be a solid team this year ready to take the next step in 2019 ... or Santana could get old fast, the rest of the infield stink and the OF be average. In that latter scenario, even if Arrieta pitches well in 2018-19, the Phils would have little reason to extend because they're back in rebuild mode. Is there a NTC of any sort in this contract? If not, a good-, decent-performing Arrieta may get shifted at the deadline 2019.

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