Dykstra: Limiting Downside Risk

Baseball teams without the New York Yankees' deep pockets are haggling not just over how many millions to shell out for free agents this season. As always, contract length is a significant factor.

After Jason Giambi made $23.4 million during his final year with the Yankees, the $4 million he took from the Oakland Athletics Wednesday may not be the most disappointing aspect of his deal. The veteran designated hitter's contract allows the team to buy him out the following year for $1.25 million.

Faring a little better, starting pitcher Derek Lowe has been offered a three-year deal with the New York Mets that would pay him $36 million. And the Chicago Cubs are believed to be picking up switch-hitter Milton Bradley for $30 million over three years. But most free agents have little option other than one-year contracts because teams want to limit their downside risks.

In free-agent negotiations, teams may want to lower the risk that the player won't live up to his record, or worse -- will suffer performance-limiting injuries. On the other hand, players want to maximize both deal size and length -- and for the same reasons. Players also worry about injuries and want to lock in long-term salaries.

Investors can limit downside risk in options contracts as well. While they don't have to worry about injuries, investors do need to make sure they aren't exposing themselves to massive losses. My deep-in-the-money (DITM) options trading system -- which has a phenomenal winning record -- limits downside risk. That type of risk is an issue that comes into play in today's question from a reader.