Everyone loves options. It’s why Blockbuster carried “Gone with the Wind,” even though all people wanted to rent was “Independence Day” back in 1997, but people wanted the option to watch the highest-grossing American film adjusted for inflation. Our desire for optionality is so great that NBA teams and players will haggle over them more than massive sums of money.
Options, as a contractual concept, are relatively simple. An option is a set amount of salary over a specified timeframe that a designated party can opt into or opt out of. Functionally, it’s a contract within a contract where one party holds the option to continue or terminate the deal. All options, team or player, have exercise dates that are usually around the eve of NBA free agency on July 1.
A player option is one of the most valuable contractual concessions a player can land. It provides players the option to continue their contract at a known salary, or end their current contract and explore free agency, but its power goes far beyond that.
A great example of the power of the player option is the Cleveland Cavaliers’ current situation with Donovan Mitchell. Mitchell is in his prime and coming off an exceptional season but has one more year left on his deal before he has a player option. While Mitchell has two more seasons of guaranteed money should he want it, the Cavaliers only have one more year guaranteed of Donovan Mitchell. This predicament tilts leverage toward Mitchell, and he can easily ask for a massive contract extension from the Cavaliers, while also asking for certain organizational promises such as a commitment to winning.
When a player is still highly productive, a player option acts as a pressure point to get extended sooner and for more money or hit the open market to find the highest bidder. However, if a player declines or is injured, a player option can be exercised to guarantee a salary they couldn’t get on the open market.
A classic example was Russell Westbrook exercising his 2022-23 player option for $46.3 million with the Los Angeles Lakers. Westbrook originally signed a five-year extension with the Thunder in September of 2017 coming off an MVP season. The extension had him under contract for six more seasons and if maintained a high level of play he could have used his fifth-year player option to land another large contract. However, Westbrook declined significantly in the six subsequent seasons, and his contract was viewed as one of the worst in the league. His player option allowed him to be paid like an MVP for one more season before he had to settle for functionally the veteran minimum.
Player options provide the best of both worlds. It’s a tool for players to exert pressure on organizations to get more years of gargantuan salaries or hit the open market again, but it is also a safe haven should a career go awry, making it the most player-friendly contractual feature.
What is a team options?
While options are an extremely valuable concession for players, they aren’t nearly as impactful for teams. A team option is exactly like a player option, except the team gets to decide on exercising it. Obviously, teams love to have team options in contracts because you can get out of a bad deal quickly or hold on to a good deal for a bit longer, but they don’t have the same practical benefits as a player option.
The main reason is that to negotiate a team option into a contract in the first place, a player has to receive something in return. Usually, this comes in the form of a balloon payment, where a player lands a salary well beyond their perceived market value for a short period and in return, the team gets an option. The last offseason provided a great example of the balloon payment-team option combination in Bruce Brown.
Brown signed a two-year, $45 million deal with the Indiana Pacers, which carried a $23 million team option for the second season. Brown is an excellent role player, but in no world was he worth over 13 percent of the salary cap. However, the Pacers were willing to overpay Brown to gain the optionality of a team option. In all likelihood, Brown and his agent were fully prepared to have that option declined, but at the cost of $22 million for one season, it was deemed worth it.
On top of teams generally having to overpay players in salary to get a team option, more often than not, those options are picked up by the teams. After getting traded mid-season as part of the Pascal Siakam trade, Brown’s $23 million team option was picked up by the Raptors, which is informative.
Once Brown’s team option was exercised, the Raptors had $117.7 million in active salary with the salary cap set at $141 million. However, they re-signed Immanuel Quickley to a five-year, $175 million deal worth around $35 million per season, and they may bring back Gary Trent Jr. at a figure around his $18.5 million salary for 2023-24.
The Raptors, due to veteran exceptions, can go beyond the salary cap to keep all three at around $171.5 million in salary commitments and look to trade Brown or Trent later if needed, but if they were to cut Brown loose and still retain Quickley and Trent, their salary commitments would be at $148.5 million, still beyond the $141 million salary cap.
Team options are most valuable as a feature of rookie scale contracts. Every first-round pick has team options for their third and fourth seasons. These options are almost always exercised because of the low salary compared to free-agent talent. Sometimes, role players sign deals with team options to have a better chance of extending their time under contract and will break out after. An example of this is Moritz Wagner with the Orlando Magic. Wagner signed a two-year, $16 million deal with a second-year team option. He promptly had the best season of his career and the Magic were more than happy to have him for less than his market value.
Generally speaking, free agent contracts with team options are a representation of a low-impact talent. It gives teams the chance to keep a player at a below-market rate or use their cap hit in a productive way for roster building. However, none of that sounds too great for a player. Either you’re kept around to be shipped out, or you’re kept around because you’re underpaid.
Options are a middle ground to appease players and front offices. It allows superstar players who are constrained by max contracts to get something of value that doesn’t come in the form of salary, and it gives teams much-needed flexibility to build out a roster. The mechanics of options are incredibly simple, but how they’re used and the ramifications differ significantly.
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