The Value of the Opt-Out Clause in the David Price Contract

David Price can opt out of his seven-year, $217 million contract in three years? That’s either terrible for the Red Sox or a boon for the Red Sox, depending on how you think about it.

It’s terrible for the Red Sox!

It’s power in the hands of the player, since it’s a player option. If Price plays well, and the market continues to grow, they’ll have paid $30 million a year for three years and will have to get right back into negotiating with their ace, along with every other team.

If he gets hurt or plays poorly or the market doesn’t perform the same way going forward, they suddenly have to pay yesterday’s going rate for an overpriced, possibly hurt, aging ace… for another four years.

And before you say that it’s great for the Sox to be able to walk away if they feel the market will overvalue their pitcher… they could trade him if the market valued their under-contract ace more than they did. They would have a way to react other than just walking away, and they’d presumably get some sort of return for their asset.

It’s great for the Red Sox!

The opt-out makes it more likely that they get three good years from their investment and move on. It has to make it more likely than it would if the team gave him a seven-year confirmed deal, at least. That might be a matter of semantics, but it’s a fact. And teams prefer fewer years and higher average annual salaries, since it allows them to avoid larger commitments and work with greater flexibility.

The age-related decline experienced by a player — and especially by a pitcher — isn’t as regular as our aging curves suggest, not typically. With this contract, the Red Sox can see some of the better years of Price’s career and collect the internal data that results in re-signed free agents outperforming those who changed teams. There’s some benefit to the team.

There’s no better argument for this then the fact that the contract Price actually got was cheaper than our calculator estimates. It looks like the Red Sox got as much as $24 million off the asking Price for adding in the opt-out, so they got money for their efforts.

David Price’s Contract — 7 yr / $217.0 M

Year	Age	WAR	$/WAR	Est. Value	Actual Contract
2016	30	5.3	$8.0 M	$42.4 M	$30.0 M
2017	31	4.8	$8.4 M	$40.3 M	$30.0 M
2018	32	4.3	$8.8 M	$37.9 M	$30.0 M
2019	33	3.8	$9.3 M	$35.2 M	$31.0 M
2020	34	3.3	$9.7 M	$32.1 M	$32.0 M
2021	35	2.8	$10.2 M	$28.6 M	$32.0 M
2022	36	2.3	$10.7 M	$24.7 M	$32.0 M
Totals		26.6		$241.2 M	$217.0 M

Assumptions
Value: $8M/WAR with 5.0% inflation
Aging Curve: +0.25 WAR/yr (18-27), 0 WAR/yr (28-30),-0.5 WAR/yr (31-37),-0.75 WAR/yr (> 37)

But that’s a bit simplistic, maybe, to just take the contract number and subtract it from the calculator’s number and call that the value of the opt-out. David Price got $2 million more than Clayton Kershaw — probably so he could have the biggest contract ever given to a starting pitcher. That sort of thing happens.

Here’s another, simple way of showing that the top contracts don’t move with the same velocity as the rest of baseball. Roger Clemens was the highest paid player in 2007, with a $28 million salary. Miguel Cabrera and now Price lead today’s baseball with $31 million a year. In the meantime, the cost of a win on the free agent marketplace has increased by roughly twofold.

We should also look at the value of the opt-out in terms of possible outcomes. If the Red Sox get a 10th percentile David Price, they get him for seven years and keep him. If the Red Sox get a 90th percentile David Price, they get him for three years and lose him. Add up all the different ways this can go down, and you get another monetary value for that opt-out clause. Sky Kalkman made a calculator that attempts to break down the value of the clause just this way.

Starting with Price’s Steamer-projected 5.3 wins in 2016, and having Price opt out at the 70th percentile or better, Kalkman’s calculator suggests that the the opt-out clause is worth $10 million to the player. Dave Studeman’s version (below Sky’s) operates on slightly different assumptions and produces a figure of $13 million. That doesn’t quite get us to the difference between the actual contract and the calculator’s version, but we know that the fringe tails of the market don’t always work the same as middle.

And if you look at it this way, it’s fine for both sides. The Red Sox got a few dollars off the contract and upped the likelihood that they just signed a premier player to three of the best years of his career. The player got long-term security, an opt-out worth $10 million once you sum up the possible outcomes, and the chance to get back on the market before he’s considered too old to reward handsomely.