Comparing Kershaw and Tanaka’s Opt-Out Clauses

This post is going to examine the value of the opt-out clause in both the Clayton Kershaw and Masahiro Tanaka contracts. I think this is interesting because the Yankees gave Tanaka an opt-out one year earlier, and gave that option to a commodity with a much more uncertain value.  As we will see, the opt-out clause for Tanaka is going to be a lot more costly to the Yankees than the clause was for Kershaw and the Dodgers.

Let’s start with the projections for each player. ZIPS and STEAMER don’t have anything for Tanaka, but we can make a guess based on the contract he was given that he’s at least expected to be worth a lot of wins over the next several years.  Since he’s the same age, it seems approximately fair to start with 5 wins, and reduce in the same pattern that Kershaw got.  I’ll use the values from Dave Cameron’s excellent article the other day for Clayton Kershaw, and I’ll also take the $/WAR from his projected inflation.  Excess value is the value of that player’s WAR, minus salary.

Tanaka Kershaw
AGE WAR $/WAR Salary Excess Value AGE WAR $/WAR Salary Excess Value
25 5.0 6.0 22 8.0 25 5.5 6 30 3.0
26 5.0 6.3 22 9.5 26 5.5 6.3 30 4.7
27 4.5 6.6 22 7.7 27 5 6.6 30 3.0
28 4.5 6.9 22 9.1 28 5 6.9 30 4.5
29 4.5 7.3 22 10.9 29 5 7.3 30 6.5
30 4.0 7.7 22 8.8 30 4.5 7.7 30 4.7
31 4.0 8.0 22 10.0 31 4.5 8 30 6.0

The key here is not going to be the expected value — it’s going to be the possible variation. Kershaw is expected to get 5.5 wins next year because of the ever-present risk of injury — there are probably Dodgers fans going nuts over that projection because they know that a healthy Kershaw, pitching like he can, is going to be worth closer to 7 wins.  There are certainly scenarios where he manages that, but also scenarios where he tears his rotator cuff and is worthless.  While there is a continuum of possibilities, let’s break the world into two scenarios for each pitcher, an up and a down. The only requirement is that the weighted average of each scenario has to average out to their projections.  I’ve made up some basic numbers here, and you might think they’re reasonable, you might think they’re not, but the point of this article is to illustrate how one extra year and some extra volatility can affect the value of an opt-out clause.

In each scenario, I make the downside a mirror image of the upside. For Tanaka, because he is an unproven commodity, I’ve added 2 WAR to the upside, and subtracted 2 for the downside. For Kershaw, I’ve just added/subtracted 1 for each. I gave each scenario a 50-50 chance of happening.

GOOD Tanaka-50% GOOD Kershaw-50%
AGE WAR $/WAR Salary Excess Value AGE WAR $/WAR Salary Excess Value
25 7.0 6.0 22 20.0 25 6.5 6 30 9.0
26 7.0 6.3 22 22.1 26 6.5 6.3 30 11.0
27 6.5 6.6 22 20.9 27 6 6.6 30 9.6
28 6.5 6.9 22 22.9 28 6 6.9 30 11.4
29 6.5 7.3 22 25.5 29 6 7.3 30 13.8
30 6.0 7.7 22 24.2 30 5.5 7.7 30 12.4
31 6.0 8.0 22 26.0 31 5.5 8 30 14.0

 

BAD Tanaka-50% BAD Kershaw-50%
AGE WAR $/WAR Salary Excess Value AGE WAR $/WAR Salary Excess Value
25 3.0 6.0 22 -4.0 25 4.5 6 30 -3.0
26 3.0 6.3 22 -3.1 26 4.5 6.3 30 -1.7
27 2.5 6.6 22 -5.5 27 4 6.6 30 -3.6
28 2.5 6.9 22 -4.8 28 4 6.9 30 -2.4
29 2.5 7.3 22 -3.8 29 4 7.3 30 -0.8
30 2.0 7.7 22 -6.6 30 3.5 7.7 30 -3.1
31 2.0 8.0 22 -6.0 31 3.5 8 30 -2.0


Let’s think about what happens in each scenario when it comes time to exercise the opt-out clause.  Shockingly, GOOD Kershaw and GOOD Tanaka each exercise the clause. We can see this reflected in the positive “excess value” column of each chart — age 29 for Tanaka and age 30 for Kershaw. They could get more on the free market, so they will. BAD Kershaw and BAD Tanaka both stick with their contracts, because they’re being paid more than market value.  Let’s re-do the charts from the teams’ perspectives, reflecting the opt-out clauses now:

GOOD Tanaka-50% GOOD Kershaw-50%
AGE WAR $/WAR Salary Excess Value AGE WAR $/WAR Salary Excess Value
25 7.0 6.0 22 20.0 25 6.5 6 30 9.0
26 7.0 6.3 22 22.1 26 6.5 6.3 30 11.0
27 6.5 6.6 22 20.9 27 6 6.6 30 9.6
28 6.5 6.9 22 22.9 28 6 6.9 30 11.4
29 0.0 7.3 0 0.0 29 6 7.3 30 13.8
30 0.0 7.7 0 0.0 30 0 7.7 0 0.0
31 0.0 8.0 0 0.0 31 0 8 0 0.0

 

BAD Tanaka-50% BAD Kershaw-50%
AGE WAR $/WAR Salary Excess Value AGE WAR $/WAR Salary Excess Value
25 3.0 6.0 22 -4.0 25 4.5 6 30 -3.0
26 3.0 6.3 22 -3.1 26 4.5 6.3 30 -1.7
27 2.5 6.6 22 -5.5 27 4 6.6 30 -3.6
28 2.5 6.9 22 -4.8 28 4 6.9 30 -2.4
29 2.5 7.3 22 -3.8 29 4 7.3 30 -0.8
30 2.0 7.7 22 -6.6 30 3.5 7.7 30 -3.1
31 2.0 8.0 22 -6.0 31 3.5 8 30 -2.0

Now let’s take the expected value of these two scenarios, which is in this case a simple average:

Expected Value Tanaka Expected Value Kershaw
AGE WAR $/WAR Salary Excess Value AGE WAR $/WAR Salary Excess Value
25 5.0 6.0 22 8.0 25 5.5 6 30 3.0
26 5.0 6.3 22 9.5 26 5.5 6.3 30 4.7
27 4.5 6.6 22 7.7 27 5 6.6 30 3.0
28 4.5 6.9 22 9.1 28 5 6.9 30 4.5
29 1.3 7.3 11 -1.9 29 5 7.3 30 6.5
30 1.0 7.7 11 -3.3 30 1.75 7.7 15 -1.5
31 1.0 8.0 11 -3.0 31 1.75 8 15 -1.0

We can see that in both cases, the post-option years of the contract become negative propositions for the teams — in fact, they would have to be, by how we’ve implicitly stated the conditions under which the players opt out: if the player were expected to provide positive value to his team, he would opt out.

So how much is the option worth? Ignoring the $20 million posting fee, the Tanaka contract, sans opt-out, was expected to produce $63.9M in excess value for the Yankees. With the option, the expected excess value drops down to $26.1M.  That’s a drop of $37.8M. This could be thought of as the extra money Tanaka puts into his pocket from years 5 onward, if he comes into the league and becomes Justin Verlander.  Kershaw, on the other hand, would be expected to generate $32.3M for the Dodgers, without the opt-out. Now his contract is only worth $19.1M to them. That’s a reduction in value, but because we’ve made him less uncertain, and because the option occurs after year 5, not year 4, the reduction is only $13.2M.  So the extra year and the double variability make Tanaka’s option worth $24.6M more than Kershaw’s.

Again, this depends largely on the choices I’ve made for the range of possible outcomes, and I’ve kind of picked Tanaka’s projection out of thin air (since the excess value of the contract with the opt-out is only $6.1M, considering the $20M posting fee, I would argue that I’m not that far off). I could have made more possible outcomes, or maybe even defined a probability distribution function and integrated over that, if I knew how to do that sort of thing. The only lesson we’re going to be able to take from this is how one year and some extra variability affect the value of the opt-out clause.



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The Foils
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The Foils

Good Tanaka is worth more than Good Kershaw?

“Since he’s the same age, it seems approximately fair to start with 5 wins, and reduce in the same pattern that Kershaw got.”

It seems approximately fair to assume Tanaka will be a top-10 (literally, there were 10 pitchers in 2013 with 5 or more fWAR) pitcher because he’s young and paid?

jiveballer
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jiveballer

I must second the opinion that it is a stretch to assume nearly equal WAR for the two.

If you believe that the Yankees smartly paid market value, then that assigns about 3.5 WAR for Tanaka – and that seems like the logical baseline (top-30 SP).

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