Thursday, January 21, 2016
How do optouts conceptually work?
?Let's say you have a superstar player, and he signs for eight years at 30MM$ per year. That's an 8/240 deal. Analogy: When you buy a car, you might agree to pay 30,000$.
Suppose that the player then asks for optout after 4 years. Logically, this is a benefit to the player. The team will say: uhm, ok, this option is going to cost you about 5% of your contract. We'll reduce your contract to 228MM$. But, we won't actually spell all that out for you in an itemized chart. We'll just mark it as an 8/228 deal with an optout after 4.
Analogy: you trade in your car. It'll reduce your purchase price by 5,000$, leaving you with a 25,000$ bill. The deal DOES itemize it, but unless you make a complaint later on, it becomes irrelevant.
***
Suppose a player asks for an optout after 3 AND 4 years? Team says that with two chances at opting out, the buyout cost is 8%. The player says: how about an optout after 1 and 2 and 3 and 4 years? The team says that they are carrying a huge risk, that this will cost 20%. The player says: you know what, how about an optout after every single year? The team says: 30% cost. Player says ok. So instead of an optout-free 8/240 deal, he signs a 8/168 with optout after every single year.
The report is "8/168, with optout annually". And the reaction is: "wow, this will really benefit the player". (The public didn't know that 8/240 benefit-free was on the table.)
***
The player starts with an 8/240 deal, but the TEAM asks the player for right of unconditional release after 4 years. The player says: uhm, ok, but I need an extra 5% for that option. Team agrees, and player signs a 8/252 deal. The team asks for unconditional release rights after 3 AND 4 years... and on and on we go. Finally the team asks for unconditional release rights after every single year. The player wants a 30% premium. Team agrees, and signs the player to an 8/312 deal.
The deal is reported at: "team signs player for 8/312, with right to unconditional release". And the reaction is: "wow, did this player make a monsterously great deal". (The public didn't know that 8/240 benefit-free was on the table.)
***
The 8/240 player, yada yada yada. The team asks for an optout after 4 years. Player says he wants 5% premium. Team says: we'll give you 10% IF WE EXERCISE, 0% otherwise.
The deal is reported at: "team signs player for 8/240, with a 24MM$ buyout if exercised after 4 years". And the reaction is: "wow, this player got a great deal".
***
Basically, we really have no idea how to evaluate the deal, unless we know what the benefit-free value of a deal is.
We don't know if getting a brand-new car for a net 25,000$ is good, unless we know how much trade-in value the car actually had.
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