Stefon Diggs trade and the increasing liquidity of NFL markets

Teams are now treating dead money as sunk costs and leaning into mini cycles of rebuilding

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Stefon Diggs was traded to the Houston Texans on Wednesday. Getty Images

This post is going to serve two purposes: 1) An analysis of the Stefon Diggs trade for both parties in their respective building cycles and 2) Documenting a larger trend of increasing willingness by teams to take big dead money charges.

Make no mistake about it, this was a big trade in terms of short-term impact. Any non-quarterback will only have so much of an impact, but one of the NFL’s top receivers moving at the tail-end of his prime will matter a lot for both teams. Including the playoffs, only Tyreek Hill has more receiving yards among wide receivers than Diggs since 2020 (when Diggs was traded to the Bills), and the same two receivers rank and the top-2 in first downs gained. 2023 was a down year according to Diggs’ extremely high standards, but that still equated to top-12 numbers in receiving yards, touchdowns and first downs.

WHAT THE NUMBERS SAY

Quantifying how much the trade will impact both teams is difficult, but my Offseason Improvement Index shows a greater negative impact on the Bills and point-differential added for the Texans (roughly -15 and +10, points respectively), only because the latter’s receivers were already so efficient last season and Diggs wasn’t at the same level. 15 points plus/minus over the course of a season equates to roughly half-a-win, which is significant for a non-quarterback, although not as impactful as many might expect.

Any reasonable takes on how this affects either team’s playoff and Super Bowl aspirations must be calibrated against the wisdom of betting markets. Reports are that the trade pushed the Texans Super Bowl odds from 25-to-1 to 15-to-1 (some books more like 17-to-1 now), which translates to an implied probability rise from 3.85% to as high as 6.25%.

You can view this as a small absolute move of +2.4%, or a big relative move of increasing by 60%. It’s a long way from the Chiefs and 49ers at implied probabilities around 15%, but in a league of 32 teams, having a 6% chance to win the Super Bowl puts you into the top-7 teams in the NFL, in the same tier as the Eagles and Cowboys (both roughly now at 17-to-1).

For the Bills, the impact was smaller, with odds moving around 1% in implied probability, settling around 13-to-1, or 7.14%. The Bills’ Super Bowl odds had been moving to the negative prior to the trade, with the team shedding players to comply with the salary cap, and implicit signaling that this was a “reset” year after pushing hard on the throttle the last two seasons. By my numbers, the Bills were the second best team in the NFL last year, yet they now enter the 2024 season in the third tier of AFC teams with the Bengals and Texans, materially below the Ravens and Chiefs as the respective occupants of the top two tiers.

CLASSIC WIN-WIN TRADE

The numbers tell us that this is an asymmetric trade: exactly what both parties should want. In normal markets with lots of liquidity, whenever there is a fractional difference in the utility of an asset for one party over another (either in reality or perception), that asset will change hands. The betting markets show that the Bills lost less from trading Diggs than the Texans gained, roughly by a factor of 3x. Now, you can’t view every percent gained/lost as equal, as they become harder to acquire the closer you get to the top teams in the NFL. Even still, the gap is likely still material in how the teams should value Diggs, making the trade a potential “win-win” and rational move for both sides.

You also have to factor in the compensation as part of the equation, with a future second-round pick going to the Bills as part of the deal, as well as multiple Day-3 selections headed back in the other direction. A future second-round pick is worth around $20 million in surplus value (with a discount for being a future pick and the late picks going the other way), which raises the value amount the Texans will have to pay Diggs under his current contract over its four remaining years from $75 million to around $90 million.

Realistically, Diggs, who turns 31 years old in November, will be highly productive for the next two years on average (sometimes zero or one year, sometimes three or four years), has a median cost of around $25 million per year to the Texans ($37 million in actual salary plus the pick cost amortized). That’s a big number, but would still be well outside of the top-5 in combined 2024-2025 cap hits at the position, without factoring in the trade costs for other receivers near the top (Hill, Davante Adams, A.J. Brown, etc). This is the way you should think about the cost of Diggs for both teams: the moment there is an offer on the table of picks for Diggs the true opportunity cost for the Bills includes the pick.

Diggs at $25 million per year in full cost is much more palatable for the Texans looking to build off of years of bottom-barrell pay than the Bills trying to shed costs. Not only does the trade benefit the Texans asymmetrically in Super Bowl odds, the cost is also less detrimental to one party. At this point in their rebuild, the Texans don’t have enough good players to spend money on, not just because their quarterback is on a rookie deal. It will be at least three years into the future before the Texans need to shell out a lot on cap chargers for C.J. Stroud and Will Anderson, when the first couple years of extensions normally at lower cap numbers. I documented how the Bills were at the end of an era of pushing the chips in with big trades, contracts and free agent signings.

DEAD MONEY NOW VIEWED AS SUNK COST

One big reason that trades like this are happening, or even releases like Russell Wilson, is that teams are viewing dead money properly as a sunk cost. Over the last handful of years, we’ve gone from the trades for Carson Wentz and Jared Goff establishing the biggest dead money hits in history at $33.8 million and $22.2 million to Wilson’s release triggering an $85 million hit just three years later.

For non-quarterbacks, the trade for Brandin Cooks from the Rams to the Texans in 2020 at $21.8 million was the first of the trend (I’m not counting a delusional Antonio Brown being shipped off), with Julio Jones traded at a hit of $23.25 million a couple years back and DeAndre Hopkins released at $22.6 million last offseason. Diggs’ release is going to add over $30 million in dead cap for the Bills, establishing a new mark.

Increasingly wealthy team owners are realizing that dead money is simply a sunk cost: it was already paid out and doesn’t affect cash budgets going forward. General managers are now empowered to move players with big accounting chargers on the books, rather than bleed the charges of money already spent over a long time for the sake of appearance. It’s also that more wealthy owners are willing to pay bigger upfront money, having more cash on hand and willing to leverage the advantages of pushing contract charges into the future when their cost as a percentage of the rising cap will decrease.

There’s probably a lesson here about the risks of extending players a second or third time (I was never a fan of the latest Diggs extension), but not in the teams’ willingness to move on from the players and how to view the costs. With the salary cap accelerating higher, don’t be surprised to see a lot more player movement throughout the year, and teams continually adjust their expectations and the relative value of players at meeting goals. The new breed of ultra-rich owner and understanding of sunk costs is going to make NFL markets a lot more exciting.