What Are Mutual Options, Anyway?

Several years ago, my colleague Mike Axisa, writing for MLB Trade Rumors, noticed a trend. Teams and players had started to use “mutual options” in contracts, in the place of a player option or team option.

Previously, options generally worked one of two ways: With a player option, it’s in the player’s sole discretion whether to stay with the team for the option year at the option price. If the player walks away, he becomes a free agent. With a team option, it’s in the club’s sole discretion whether to keep the player for the option year. If the team exercises the option, the player stays with the team for the option year at the agreed-upon salary. Unless the player has a no-trade clause, the team can trade him once the option is exercised. That’s exactly what the Rays just did with James Shields. If the club declines the  option, then it typically pays the player a certain sum of money, called the buyout.

So what is a mutual option and why is it used?

A mutual option is an agreement by the club and the player that the player will stay with the club for the option year at the option price only if both sides agree. Is that really an agreement, then? Yes. A mutual option is a hedge against volatility in the market for that player in that particular option year. If the player’s value plummets, the team can decline the option and pay the buyout. If the player’s value rises, he can decline the option and seek a better deal as a free agent. If the player’s value is stable, however, then it might be in both parties’ interest to exercise the mutual option.

The market must be volatile, as very few mutual options have been exercised by both sides. In fact, I’ve only identified four fully-exercised mutual options dating back to 2008: (1) the Cubs and Daryl Ward, for $1.2 million for the 2008 season; (2) Miguel Olivo and the Royals, for $2.7 million for the 2009 season; (3) the Astros and Brian Moehler, for $3 million for the 2010 season; and (4) the Rockies and Jason Giambi, for $1 million for the 2012 season. There may be a few more out there that I missed, but I’m betting it’s not many.

On other the hand, there’s a long list of mutual options declined either by the player or the team. Heading into 2013, Adam LaRoche, Sean Burnett, and Ryan Ludwick all walked away from mutual options and into free agency. Burnett turned down a $3.5 million mutual option with the Nationals, and signed instead with the Angels on a two-year deal worth at least $7.5 million, but as much as $13.25 million over three years if certain incentives are met. Ludwick walked away from a $5 million mutual option with the Reds, only to re-sign with Cincinnati for 2 years/$15 million. Adam LaRoche declined his $10 million mutual option with the Nationals, and is still seeking a multi-year deal, either with Washington or elsewhere. LaRoche had previously turned down a mutual option with the Diamondbacks for the 2011 season, before signing with the Nationals. Yorvit Torrealba, Aaron Harang, Jon Garland, Scott Posednick, and Henry Blanco also walked away from mutual options over the last several seasons, seeking greater fortune on the free-agent market.

Many teams have declined mutual options, when players were either too expensive or no longer fit their plans. The A’s inherited a $10 million mutual option in Stephen Drew’s contract when they traded for the shortstop from the Diamondbacks last season. Oakland declined the option, and paid Drew $1.35 million in the buyout. Drew then signed with the Red Sox for 1 year/$9.5 million. When added to the buyout, Drew came out ahead. The Phillies declined a $5.5 million mutual option with Placido Polanco for 2013, and paid him $1 million instead. Aaron Cook, Vladimir Guerrero, Nick Johnson, Russell Branyan, and Erik Bedard, among others, had mutual options declined by their teams in the last few years.

If mutual options are so rarely exercised, why are they used at all?

One reason is to hedge against volatility, as I explained above. Another rationale for mutual options is to conserve on transaction costs down the road. If the player wants to stay with the team, and the team wants to keep the player, the mutual option works like a pre-packaged deal, without the monetary and other costs that come along with off-season negotiations.

And then there’s the deferred money rationale: the buyout, when combined with the player’s yearly salary, sets a floor for what the team will pay the player, but gives the team the flexibility to defer part of its payments to the future. Bear in mind, however, that mutual options are treated like player options under the luxury tax provisions of the Collective Bargaining Agreement. As a result, a team can defer payments to a later year, but the amount of the mutual option buyout will be included in the player’s guaranteed salary when determining the AAV of the contract. To be fair, most teams that are concerned about deferring payments to later years aren’t the ones most concerned with having a payroll above the luxury tax threshold.

If players and teams that are risk-averse, mutual options can make sense. A club may want to keep a player for an extra year, but doesn’t want to give the player the sole power to decide whether to stay or go. A player may like the idea of sticking with a team, but doesn’t want to give the team sole discretion to keep the player if circumstances change.

Mutual options can also be used to defer payments to later years, but not for purposes of the luxury tax. In that way, it’s a club option that acts like a player option. For teams with budgeting woes, that’s not too much of a concern. And it may provide the cash-flow relief the team needs to get the deal done.

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Wendy writes about sports and the business of sports. She's been published most recently by Vice Sports, Deadspin and NewYorker.com. You can find her work at wendythurm.pressfolios.com and follow her on Twitter @hangingsliders.

22 Responses to “What Are Mutual Options, Anyway?”

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  1. Travis L says:


    How does the mutual option work WRT draft compensation? I see 4 situations: player/team declines their side, and whether or not the player option is above/below the $13 mln line.

    Could a team decline the option (say it’s for $17mln) then offer arbitration in hopes of compensation? Or is the option value what’s considered (player declines option, draft pick only if option was above the magic line)?

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    • Wendy Thurm says:

      I do not believe that options are considered “qualifying offers” that would trigger draft compensation. If option is declined by either side, player becomes FA unencumbered by the QO tag.

      Same for arbitration, I believe. Once option is declined, player is FA. Arbitration does not kick in.

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      • Travis L says:

        So having a player option in a contract means a team is disqualified from making a “qualifying offer”, and thus ineligible for draft pick compensation?

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      • Evan says:

        Though it was called an “opt out” this is essentially what happened with Rafael Soriano this season. Soriano was set to earn $14M for 2013, but had the option to opt out, receive a $1.5M buyout and become a free agent.

        After Soriano opted out the Yankees made the qualifying offer of $13.3, which he declined. Interestingly, because of the buyout, Soriano could have increased his 2013 compensation by $800K by opting out and then accepting the qualifying offer, though I don’t know the value of additional perks that may have been specified in Soriano’s original contract.

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      • Wendy Thurm says:

        Thanks Evan. I was mistaken.

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  2. jcxy says:

    I really like this recent series on contract topics.Very well researched and generally cool stuff!

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  3. Tim_the_Beaver says:

    I enjoy these articles on components behind the game that I typically don’t take the time to research. Thanks Wendy!
    One criticism, assuming I understand your post (trying to write this as simply as possible): I would be careful of your description of the mutual option as a hedge. In the strictest (and IMO best) definition of the word, a hedge not only protects against the downside, but still allows for extracting value in the upside. This is not the case in a mutual option. As you note, if the player increases in value, the player is likely to decline the option, and thus the team gets no value in the upside*. The way you describe it, one could view a one year contract as a “hedge” (in comparison to a two year contract). Neither of these examples really fits the best definition of the word.
    *exception: as you note, in the case of a player maintaining roughly the same value, the team perhaps saves on some transaction costs.
    If we’re going to dip in the world of finance for our definitions (not necessarily a bad thing), I’m going to have to ponder what this situation would be represented by in terms of options. perhaps a short straddle? http://en.wikipedia.org/wiki/Straddle#Short_straddle
    would love somebody else’s opinion on this

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    • Tim_the_Beaver says:

      Perhaps it’s some combination of a short-straddle and a butterfly.
      From the team’s perspective, it’d be butterfly on the left (limited loss if player plummets in value), straddle on the right (theoretically infinite loss if the player soars in value). And a little hump of value right around the strike price.

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      • TKDC says:

        I don’t see how the mutual option ever helps the team at all except for as some have mentioned avoiding the cost of negotiating. Presumably, the player has given something up, however small, to get the mutual option.

        It’s really just unvested deferred money, which vests if the player accepts his side of the option, and doesn’t vest if he rejects it.

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      • Retro says:

        Isn’t an option whether player or mutual a small way to help a team defer salary? I could be off on this, but lets use Derek Jeter’s contract for example:
        11:$15M, 12:$16M, 13:$17M, 14:$8M player option ($3M buyout)

        As far as the player is concerned, this contract is the same as 51M over 3yrs (3M of which is deferred) and a player option of 5M . But for bookkeeping purposes the Yankees aren’t costing 51M over 3yrs. But, instead costing 50.25M over 3yrs and .75M on the 4th year.

        I know 3/4 of a mil isn’t much in Yankee terms, but assuming the 50% threshhold, thats a savings of $375,000, by making a simple bookkeeping change. What accountant would do that?

        As I said, I’m not positive, thats the way it works. But thats what I always assumed the team did it for.

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  4. Sparkles Peterson says:

    How is it a hedge against volatility? If the player’s value goes up, the player rejects the option. If the player’s value goes down, the team rejects the option. As I see it, the mutual option is a way to keep both parties from having to sit down for a few hours and negotiate/write up a new contract if things remain exactly inert.

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  5. TKDC says:

    The player is the one that is hedging against risk. He get’s something of a pay-out even if the team doesn’t accept it’s side of the option, but has neither given up his right to elect free agency or guaranteed a salary at a certain amount.

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  6. MikeS says:

    I love these articles. They are really great, Wendy.

    I always found mutual options kind of silly. You are betting that both the team and the player accurately predict the players performance (and therefore value), the teams situation and the free agent market years in advance. The fact that so few have been picked up supports how difficult it is to do that.

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  7. jpg says:

    A lot of you guys are missing the point. Mutual options are almost always put in contracts at the request of the agent. It’s guaranteed free money for the player with zero risk. If the player is bought out at the end of the year he gets a few bucks but can still sign another contract. If the team picks up the option the player can accept or take the buy out. That’s why the mutual option year is usually an exorbitant amount (like Johan Santana’s 2014 option for $25MM) or at least an amount that’s significantly greater than the value of the final year of the contract. Again, it’s basically free money for the player.

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    • cpebbles says:

      No. Those are pretty much exclusively team options (As Johan Santana’s 2014 option is), and while the buyout does increase the value of the contract, the agent isn’t getting anything by anyone with it. Teams are willing to give say a $5 million buyout on a $25 million option because they’re willing to pay an extra $5 million deferred, with a $20 million option, and it’s simply easier to frame it as a buyout.

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  8. harpago17 says:

    I wonder why we never see mutual options that can be exercised by either side, instead of requiring both. My guess is that it would be hard to find a price that guarantees the player the security he’s looking for while also giving the team a reasonable chance of getting a “discount” down the road. It would essentially work as a team option AND a player option, where either one could put the option into effect.

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  9. Steve says:

    Wasn’t Tim Wakefield and the Sox the prime example of mutual options?

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  10. Sivart says:

    It might be just because I already knew what there is to know about contract options, but there seems to be a lot of repetition here. I’m not sure it helps convey information, and it makes reading a bit dull.

    Mutual options could be explained – probably more clearly – without repeating things with largely the same words multiple times.

    Also, for such a simple concept, it should be completely researched with all of the common questions covered (like the QO question). Then, following, the implied reasons for using a mutual option should also be close to correct. As it turned out, this whole ‘hedge against volatility’ thing is waaaay off base. Taken together, that’s providing a lot of misleading information at both the factual level, and the opinion level.

    I don’t mean to come off as overly critical, but those couple points really stuck out to me, and that rarely happens on FG.

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