[h4]50. What are option clauses? What kind of option clauses are there?[/h4]
An option clause allows a contract to be extended for one additional season after the date it is scheduled to end. For example, a five-year contract with an option for the sixth year means that if the option is exercised, then the contract extends through the sixth season, but if the option is not exercised, then the contract ends after the fifth season. Options must be exercised by the July 1 that precedes the option year, except player options for players who would become restricted free agents, which must be exercised by June 25. Once exercised, an option cannot be revoked (for example, a player cannot invoke an option on June 20th and change his mind on June 25th). Conditional options are not allowed -- the existence of the option may
not be contingent on some condition, such as the number of games the team wins or the points per game the player scores.
There are three types of options:
- Team Options give the team the right to invoke the option year. There can be only one option year (except in the case of rookie scale contracts), and the option year can't be for a lower salary than the previous season.
- Player Options give the player the right to invoke the option year. There can be only one option year, and the option year can't be for a lower salary than the previous season.
- Player Early Termination Options (ETOs) give the player the right to terminate the contract early. An ETO can't occur prior to the end of the fourth season of the contract (which implies that the contract must be for at least five seasons).
A contract may not contain more than one option in the same season (for example, the last season cannot contain both a player option and a team option). A six year contract may contain an ETO following the fourth season and an option (either player or team) following the fifth season.
Rookie "scale" contracts for first round draft picks contain team options for the third and fourth seasons (team options for the third season exist only for players drafted in 2005 or later), which must be exercised by October 31 of the prior season No other options are permitted in rookie scale contracts. See question number
41 for more information.
Here's a summary of the differences between an option and an ETO:
- Options can occur only when one season remains on the contract, while ETOs can occur when two seasons remain if the contract is for six seasons.
- Options can be included in any multiyear contract, but ETOs are allowed only with five or six year contracts.
- Options can be held by the player or the team, but ETOs are always held by the player (i.e., there's no such thing as a team Early Termination Option).
- Option years may not have a lower salary than the previous season. ETOs have no such restriction.
- A contract with a player option can be extended when the option is not exercised. A contract with an ETO may not be extended if the ETO is exercised.
There is an interesting twist regarding player options. What happens if the team waives the player before he invokes his player option? Can the player invoke the option after he is waived, thus guaranteeing his salary for the option year? To head off this situation, all contracts with player options must indicate whether the player receives his salary for the option year in the event the contract is terminated.
Player options were previously used as a way to give the player more money. A long-term deal was agreed upon with a player option after the player obtained Larry Bird rights. The player invoked the option, became a free agent, and then the team & player signed a new contract for more money using the Bird exception. H
owever, since the current CBA prevents ETOs before the end of the fourth year or more than one option year, the usefulness of this tool is now very limited.