In MLB player contracts there may be a provision called an “option” that will allow the player, club, or both, to exercise extending the contract by an additional year.
At the time of signing the original contract, players and/or clubs can add an option with a given salary amount in the extended year of the contract. There are four common option types: player, club, vesting, and mutual options.
Option Categories
A player option is a clause in an MLB contract that grants the player the choice to extend their contract by a year or not. If the option is exercised, the player will receive the predetermined salary for the final year of his contract.
If the player option is declined then the player immediately becomes a free agent. An example of a player exercising their player option was during the 2014 off-season, when Dan Haren, of the Los Angeles Dodgers, exercised his $10 million option for the 2015 season. Alex Gordon, of the Kansas City Royals, declined his $14 million player option following the 2015 season. He became a free agent and ultimately signed a 4-year/$72 million contract to return to the Royals.
A club option is similar to a player option but the club holds the power to exercise or decline the optional contract year. Club options are the most common type of option used in MLB contracts. If the club exercises the option, then the player will remain under contract for that season for the pre-agreed-upon salary amount.
If the club declines, then the player immediately becomes a free agent. Another stipulation often associated with club options is that if the option is not exercised then the club will pay the player a small “buyout” payment. For example, if the player option is for an additional year at an $8 million salary, a potential buyout could be $1.5 million.
A vesting option will be automatically exercised if a statistical milestone is reached. MLB has strict conditions for which stats can be included in these vesting options so normally accumulating stats are used for vesting options. Examples include appearances for pitchers or plate appearances for hitters. For example, Roy Halladay had a 2014 vesting option if he pitched over 415 innings across the 2012 and 2013 seasons. He did not pitch that many innings and the vesting option was not exercised.
A mutual option is pretty simple, both a player and the club must exercise the option for the player to remain under contract for the season. Given the different factors as to why clubs or teams would exercise these options lead to mutual options rarely being exercised by both parties involved.
Another clause included in some MLB player contracts are opt-outs. An opt-out allows a player to void the remaining years of his contract in the middle of the deal, thus making him a free agent.
For example, if a player signs a 7-year contract, the deal might include opt-out clauses after the 3rd and 5th seasons. Such deals will allow players to have the flexibility to test the free agent market if their on-field performance greatly outweighs the compensation of their current contract. For example, the 5-year/$110 million contract JD Martinez signed with the Boston Red Sox in 2018 included opt-outs after the 2019, 2020, and 2021 seasons.
Summary
Options are included in MLB contracts as an added layer of flexibility for the player or the club. They are used as bargaining chips for either side during the contract negotiation process.
Options and opt-outs can create leverage when a player wants a contract extension. Similarly, clubs will use and consider options when planning their roster construction during the season and in the off-season.
Related Links:
https://www.mlbtraderumors.com/2014/01/options-in-mlb-contracts-primary-option-types.html
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