THE BOOK--Playing The Percentages In Baseball

Tuesday, November 01, 2011

Paying CC to terminate his opt-out option

By Tangotiger, 10:34 AM

CC Sabathia had an opt-out option following the 2011 season. That opt-out clause had a certain amount of value when his first signed preceding the 2009 season, and that opt-out option’s value changed pitch by pitch, game by game, year by year, so that when the 2011 concluded, that opt-out option had a certain amount of value.

CC had signed a 7yr/161MM$ deal with the option going into the 2009 season. Had he not had that option, he would have signed for MORE. It might have been a 7/180MM$ deal let’s say. That is, he got some discount in order to have the opt-out option. This is really a faith in himself, that he knows more than the Yankees about how he would have aged.

In his last 3 years with the Indians, he had a total of 20 fWAR. Seeing that he was at his (theoretical) peak and had nowhere to go but down, the expectation would have been for him to accumulate something like 16.5 wins for 2009-2011, and then 15 wins for 2012-2015. Those 31.5 wins, worth a weighted average of 5.7MM$ per win gives us 179MM$. CC signs for 18MM$ less, in return for the opt-out option.

If CC earns less than 16 wins for 2009-2011, then it’s a wasted option. If he earns more than 17 wins in 2009-2011, then we have a good chance that he is aging better than expected. He will then exercise that option. He had 19 fWAR from 2009-2011. This means that CC aged better than expected.

Whereas when he signed the deal in 2009, his expected WAR for the 2012 would have been for around 4.5 wins. Today, knowing what we know with his last three seasons (and his career), his expected WAR for 2012 is closer to 5.5 wins. Because he is better today than we expected him to be, he exercices his opt-out option. This is no different than any stock option. CC Sabathia Properties is just like your Microsoft or Oracle stock options.

Had the economy not tanked, CC would have gotten a much better deal than the one he got. This is how it looked like in 2009:

Year    Wins    $/wins    Pay
2009     6.0      $5.0      $30.0 
2010     5.5      $5.3      $28.9 
2011     5.0      $5.5      $27.6 

2012     4.5      $5.8      $26.0 

2013     4.0      $6.1      $24.3 
2014     3.5      $6.4      $22.3 
2015     3.0      $6.7      $20.1

(We need to subtract 6MM$ for each of 2009, 2010, 2011, in return for the opt-out option. The 6MM$ and all the above numbers are just an illustration. I don’t know what the actual value of the option is, but it would be easy enough to figure out.)

He was paid for delivering 16.5 wins, but he delivered almost 19 wins. He was undervalued, and therefore, he wants to be properly valued.

This is what he looks like today:

Year    Wins    $/wins    Pay
2012     5.5      $5.0      $27.5 

2013     5.0      $5.3      $26.3 
2014     4.5      $5.5      $24.8 
2015     4.0      $5.8      $23.2 
2016     3.5      $6.1      $21.3

That’s 5 years and 123 million$.

The two key differences is that he’s more talented today than we expected him to be. But, with the economy tanking, he doesn’t get the larger multiplier effect. Hence, the fairly mild extension he got.

• Sabermetrics • Finances

#1 (see all posts) 2011/11/01 (Tue) @ 15:32

Glad we’re discussing this. Option valuation is one of those things that doesn’t get enough attention. People discuss contracts without considering the options associated with them.

A 3 WAR player who signs for 10 mil will seem like a bargain, but if he has a 15 mil player option the next year then it’s not a bargain at all (not that anyone would do that, of course).

I secretly suspect that players give away team options way too cheaply.

#2 Pierre (see all posts) 2011/11/01 (Tue) @ 15:56

I suspect the teams don’t value the player options properly, either. Maybe Brian Cashman is crunching this all through Black-Sholes or whatever, but the opt-out after 3 years seems like “heads I win, tails you lose” from CC’s point of view. It’s hard to imagine his market value in 2008 was really that much more than 7 yrs/$150mm, but who knows, maybe it was.

#3 Tangotiger (see all posts) 2011/11/01 (Tue) @ 16:11

He signed for 7/161. But it’s really irrelevant what you can imagine.

You can’t simply value the option at 0$, like it’s some sort of toaster throw-in.

The fact is he signed what he did, WITH the option. Without the option, the Yanks would have paid more. Now, we can try to figure out if it would have been 5MM$ more or 15MM$ more or whatnot. But it’s not 0$.

***

I’ve talked about this when I recommend that teams have the right to buy-out contracts like the NHL teams do. In the NHL, you can buy out a contract at two-thirds the remaining value (and you can spread out the cap hit over twice the remaining years of the contract). Because the NHL teams can do that means that they WILL be more likely to pay more than if they had no rights to buy-out deals.

Carl Crawford signed for 7/142. If the Redsox had the option to buyout two-thirds of his remaining value at any point in the contract, they would have paid him even more, say 7/154. After one year, they’d have the right to buy him out for 88MM$ (in addition to having already paid him 22MM$). So, it would have been a 110MM$ payment, with 44MM$ left for 6 years.

Now, they would NOT do that, because Crawford would still have at least 44M$ of value left over the next 6 years.

But let’s say he puts in another hugely disappointing year. That means that after 2 years, they’d have paid him 44MM$, and they buy out the remaining 5yrs, 110MM$ for 73MM$.

That saves them 37MM$ over the next 5 years (having spent 117MM$ over the first 2 years). In that case, they MAY buy him out.

***

For some reason, people think this has 0$ value, like the opt-out has 0$ value. They simply see the huge staggering amount of money, and can’t accept that those are discounted because of the opt-out (like CC), or guaranteed (unlike NHL).

The fact of the matter is that they are discounted.

#4 Pierre (see all posts) 2011/11/01 (Tue) @ 16:36

So, do you think the Yanks valued the option properly? My point was that 7/$161 seemed like they were paying full freight or very close to it, and the option they granted was obviously quite valuable. I.e. that it did indeed feel like they were treating it like the proverbial toaster.

#5 David MIck (see all posts) 2011/11/01 (Tue) @ 16:36

Tango, I was talking about that the other day elsewhere. Teams aren’t just handing these options out. it comes at a cost to the player. I imagine the club option comes at a cost to the team. It’s the same thing with no-trade clauses. All of these things are part of the negotiation. Teams don’t hand out options and no-trade clause along with the ink pen they give the player to sign the contract. I don’t know how much any of this costs, but like you said, it is not $0.

How would we go about calculating the value of the no-trade clause?

#6 (see all posts) 2011/11/02 (Wed) @ 22:24

It seems you could start by looking at 10/5 players hitting free agency (again) and changing teams or not; those players would have effectively no trade clauses if they stayed, but wouldn’t (unless negotiated) if they left. So maybe you look for a difference in contracts among those two sets.

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THE BOOK--Playing The Percentages In Baseball

Tuesday, November 01, 2011

Paying CC to terminate his opt-out option

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