48. What are option clauses? What kind of option clauses are there?
An option clause allows a contract to be extended for one additional season after the date it is scheduled to end. For example, a six-year contract with an option for the seventh year means that if the option is exercised, the contract extends through the seventh season, but if the option is not exercised, the contract ends after the sixth season and the player becomes a free agent. Options must be exercised by the July 1 that precedes the option year. 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).
There are various types of options:
Team Options give the team 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 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 (ETO's) give the player the right to terminate the contract early. An ETO can't occur prior to the end of the fifth season of the contract (so the contract must be for six or seven seasons), and may be made contingent on player or team performance benchmarks.
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. However, since the current CBA prevents ETO's before the end of the fifth year or more than one option year, the usefulness of this tool is now very limited.
Rookie "scale" contracts for first round draft picks contain a team option for the fourth season.
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 ETO's can occur when two seasons remain if the contract is for seven seasons.
Options can be included in any multiyear contract, but ETO's are allowed only with six or seven year contracts.
ETO's can be based on performance benchmarks, but options can't.
Only a player can be given an ETO, but an option can be given to the player or to the team.
Option years may not have a lower salary than the previous season. ETO's have no such restriction.