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The Value In The Teheran Deal Lies In The Option

Six years for $32.4 Million is fair, but the option year at $12 Million is a steal for the Braves.

Robert Hanashiro-USA TODAY Sports

Extending pitchers can be risky. They get hurt. Thus while at first glance, the six year $32.4 Million dollar extension Julio Teheran signed might look like a bargain, it's quite a risk, and on its own merits, it might even be viewed as a bad deal. For the next two seasons, before this extension, Teheran would be virtually guaranteed ~$1 Million. Then things become iffy, as his arbitration numbers would be based on his performance. His arb years may likely break down to something like $4MM, $7MM and $10MM in 2016, 2017 and 2018 respectively. Meaning that for the arb years, you're probably looking at something like $22 Million.

However, the Braves should have baked in a substantial discount in those numbers when extending Julio. With his first two free agency years projecting out values of something like $15 Million and $17 Million, considering standard free agency salary growth rates of 5.5%, it may look like a discount, but those values only hold if he doesn't get injured and maintains his rookie year level, which are far from givens. Basically, if Julio remains healthy, a relatively large if, the Braves are guaranteed to pay $32.4 Million for $37 Million dollars worth of projection during the 6 guaranteed years of the extension. A discount, sure, but a very mild discount that almost certainly doesn't make up for the risk they're taking that Julio might suffer a substantial injury, or that last season may have just been a small sample mirage.

The great thing about arbitration numbers is that they get lower if the player's performance suffers, and even if they don't they're essentially all options. If the team believes that his arbitration price is getting higher than they want to pay, and they are unable to trade the player, they can simply non-tender the player. Paying $32.4 Million for $37 Million really isn't a good deal when you consider the injury risk, as well as the fact that money has gone from non-guaranteed to fully guaranteed. It isn't a bad deal, but it's far from team friendly and represents a large risk the Braves would be taking, if the 6/32.4 portion of the deal was all there was.

However, now we look at the option year the Braves have and the picture completely changes. Because of the $1 Million buyout, it makes some sense to consider this deal as six years at $33.4 Million with an option to go to seven years at $44.5 Million. Like I stated earlier, a reasonable, non-injured projection for Julio Teheran in 2020 would peg his value at somewhere in the neighborhood of $17 Million. That's if he basically holds his 2012 peripherals (and notice I said peripherals, not ERA, if he holds his ERA, he'd be even more valuable). Because the option holds virtually no risk, that already represents a bargain. If the Braves were guaranteed to pay $12 Million for Julio's 2020 season, that would just represent a risk discount, ie the Braves got a $5 million discount by taking on the risk he'd get hurt or underperform now. However, with no risk, it's a pure discount. Lets look at some spitballed probabilities:

If Julio projected to be worth less than $12 Million in 2020 (that would be roughly a 1.5 win player, given a 5.5% rate of salary growth), the Braves would simply decline his option. That's basically some sort of injury and/or that he vastly overperformed his talent level in his rookie season.

Let's say there's a 20% chance that Julio projects as less than a 1.5 win player in 2020 at the end of 2019 and the braves decline his option. That represents an expected cost of $200,000 for 0 WAR (since they would decline the option and pay the buyout multiplied by the spitballed 20% chance it happens). Keep in mind, that given current growth rates 1 WAR in 2020 projects to be worth roughly $8 Million.

Now, let's say there is a 40% chance he's worth 1.5 WAR to 2 WAR, ie that he's a good, but not great pitcher. Taking the midpoint WAR value in that range and projecting it out to 2020 likely values, puts that at a value of something like $14 Million. That is, if Teheran underperforms, but isn't really injured, and is just basically a league average type pitcher, the Braves are already saving $2 Million on the option year. For these scenarios, the Braves have an expected cost of $4.8 Million (12 Million multiplied by 40% chance it happens) for .7 WAR (1.75 WAR multiplied by the 20 percent chance it happens).

Suppose there is a 20% chance that Teheran is a 1.5 WAR to 2.5 WAR pitcher. This would basically make him a good, not great pitcher. Roughly what he was in his rookie season. This would put his 2020 value at something like $16 Million. Under these scenarios the Braves would be paying an expected value of $2.4 Million ($12 Million multiplied by the 20 percent chance it happens) for an expected .4 WAR (2 WAR multiplied by the 20 percent chance it happens).

Next, let's say there there is a 10% chance he blossoms into a very good #2 pitcher between 2.5 and 3.5 WAR. Using the same methods as above, the Braves would be getting Julio at roughly half price in these scenarios. Expected values are $1.2 Million for .3 WAR.

Finally, lets say there is a 10% chance Julio looks like an ace in 2020. That gives us a 10% chance at WAR between 3.5 and 6.5. The Braves here would be getting a $40 Million pitcher for $12 Million in this scenario. Expected values are $1.2 Million for .5 WAR.

The beauty of using expected values above is that now we can simply add them to see what this looks like. Adding all these scenarios together, the Braves are looking at paying $9.8 Million (the weighted mix of his $12 Million option and declining the option) for 1.9 WAR. 1.9 WAR in 2020 will likely cost $15.2 Million. Essentially Julio's 2020 option represents $6 million of risk free savings, ie it's essentially free money for the Braves, something of which they can use all they can get.

While the first six years of Julio's contract being guaranteed does represent a substantial risk for the Braves, having the seventh option year at such a reasonable rate more than makes up for this risk. For a team like the Braves, they have to roll the dice on occasion for young players they believe in. Obviously, contrary to some beat writers' assertions last spring, the Braves believe in Julio Teheran. And they're taking relatively little risk in doing so, with the potential for a huge bonanza if he's even a number 2 type starter down the road, let alone if he materializes as an ace.

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