Early Termination Options

LeBron James, Carmelo Anthony, Chris Bosh and Dwyane Wade are among the luminaries facing summer decisions about whether to exercise the early termination options in their contracts. 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 have early termination options for this summer and player options for 2015 as part of their contracts. The Heat stars signed under the previous collective bargaining agreement. The new CBA prevents deals from running longer than five seasons, and since early termination options may only be included in five-year pacts, contracts 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 hold ETOs are marquee names, since few others sign deals that cover five seasons. It also means that 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 new CBA.

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 the contract 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 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, in large measure because many of them are for the maximum salary, which precludes front-loading.

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.

There’s another difference between player options and ETOs that 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. Still, 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.

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 was used in the creation of this post.

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