Will Muschamp is the hottest commodity in college coaching circles right now. His stock has risen this past year to the point where he gets mentioned for pretty much every big time head coaching job that opens up. It will most likely continue to rise. Texas was rightfully concerned about keeping him. So what did they do about it?
A call option gives an investor the right to purchase a stock at a specified price within a specific period of time. The person who buys the call believes the stock will rise in the future and so he's willing to pay a premium now in order to have the opportunity to purchase the stock at a discount later should it in fact rise in value. He's not obligated to purchase it.
So let's say a stock is currently trading at $20 a share, and you believe it will rise in value to $40 a share in the next 3 months. You buy a call option that will allow you to purchase the stock for $25 a share. If the stock goes up, you excercise the option. If the stock goes down, you don't. You're only out the premium you paid for the opportunity.
And that's essentially what Texas has done with Muschamp. They've bought a call option that will give them the opportunity to make him their head coach at some point in the future believing that his value will continue to rise. The premium they paid is the $900,000 base salary for Muschamp beginning next year and any salary increases after that.
Pretty smart.