Optionality in NFL Player Contracts

Most National Football League (“NFL”) contracts are not fully guaranteed, and can be viewed as a series of team options. We use finance theory to value the options implicitly embedded in these contracts. For any contract, we calculate an “option-adjusted value” that allows us to compare contracts with different structures. We show that front-loaded contracts that pay large signing bonuses have higher “option adjusted values” than back-loaded contracts that pay no signing bonuses. We also estimate the volatility of player value, which is an important input in valuing the options