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Early Termination Options

Early termination options were a factor in 2014, when LeBron James, Carmelo Anthony, Chris Bosh and Dwyane Wade all exercised the early termination options in their contracts to hit free agency. In 2015, this sort of option is largely a vestige of rules from previous collective bargaining agreements. Thaddeus Young and Jared Dudley are the only players with early termination options for 2015/16, and only Deron Williams and Carmelo Anthony have contracts that include this type of option for any subsequent season.

Early termination options, or ETOs, are opportunities for players to free themselves from their contracts before they run to term, as the name suggests. They’re essentially player options, but with a few tweaks. They were originally designed to give players a second chance to escape from their deals, since player options can only cover one season. That’s why James, Bosh and Wade all had early termination options for 2014/15 and player options for 2015/16 as part of the contracts that they opted out of in 2014. All three signed under the previous collective bargaining agreement, just like Dudley and Young. The existing collective bargaining agreement prevents deals from running longer than five seasons, and since early termination options may only be included in five-year pacts, a contract can no longer contain both an ETO and a player option.

That ETOs are only allowed in five-year deals also means that most of the players who will hold ETOs from now on will be marquee names, since few others sign deals that cover five seasons. Going forward, ETOs will be exclusively for free agents who re-sign with their teams via Bird rights, since there’s no other way to obtain a five-year contract in the current collective bargaining agreement. That was the case with Anthony when he re-signed with the Knicks in 2014 and with Williams in 2012, when he was the most sought-after free agent on the market before re-upping with the Nets. Both signed their contracts under the current collective bargaining agreement rules.

Perhaps one of the most notorious ETOs belonged to Dwight Howard. Now, he doesn’t have an ETO in his contract with the Rockets, and he couldn’t have received one anyway, since he signed it under the existing collective bargaining agreement and changed teams as he did so. His previous contract contained one, but when the 2012 trade deadline came and rumors swirled about his future with the Magic, he formally agreed not to exercise it, thus giving up the chance to hit free agency that summer. It was an odd move, in part because players with ETOs don’t have to tell the league or their teams that they’re not going to use them. They can simply keep silent on the matter through the option deadline, which is June 29th unless the team and player negotiated an earlier date, and remain under contract. Players with ETOs only have to give notice by the option deadline if they’re using them to opt out. The opposite is true with player options; those who have player options and want to remain under contract have to say so by the option deadline. Otherwise, they become free agents.

ETOs allow teams and players slightly more room for negotiation than standard player options do, since the salary in a player option year can’t be any lower than in the previous season. There’s no such rule with an ETO, so players can have their contracts front loaded, with an ETO season at a reduced salary around as insurance against an injury or decline in play. If the player is still performing at a high level after four seasons, he can exercise the early termination option to hit free agency and seek another lucrative contract. Teams may also benefit from this rule, similarly using the cheaper fifth season as protection against a drop-off in the player’s production. Still, no existing contract with an ETO is structured this way.

A player who signs a deal with a trade kicker stands to benefit if the contract also includes an early termination option. A trade kicker is a bonus that a player receives when he’s traded, and it’s usually equal to a percentage of the money remaining on the deal. Standard player option seasons don’t count toward trade kickers, but seasons covered by ETOs do.

Another difference between player options and ETOs rarely comes into play. If a player opts out using a standard player option, he can still sign an extension before hitting free agency. That’s not the case with ETOs. However, most players make formal decisions on these options not long before becoming free agents, leaving little time to negotiate extensions. Veteran extensions usually aren’t beneficial to players under the current collective bargaining agreement anyway, so there’s little incentive to choose a player option over an ETO just to gain more flexibility in signing an extension.

ETOs probably won’t disappear completely from the NBA landscape, as the deals Williams and Anthony signed proved that there are still circumstances in which they’re desirable in the NBA’s current landscape. Yet unless rules change during the next labor negotiations, don’t expect to see too many of these options.

Here’s a look at the only early termination options in existence as of May 2015:

Thaddeus Young, Nets — $10,221,739 for 2015/16
Jared Dudley, Bucks — $4.25MM for 2015/16
Deron Williams, Nets — $22,331,135 for 2016/17
Carmelo Anthony, Knicks — $27,928,140 for 2018/19

Note: This is a Hoops Rumors Glossary entry. Our glossary posts will explain specific rules relating to trades, free agency, or other aspects of the NBA’s Collective Bargaining Agreement. Larry Coon’s Salary Cap FAQ and the Basketball Insiders Salary Pages were used in the creation of this post. 

An earlier version of this post appeared on March 11, 2014.

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