Adam brought up this very idea last week and according to this NY Post article, the Yanks might be looking to exercise Gary Sheffield's $13-million option for 2007 and then trade him:

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YANKS MULL SIGN-AND-TRADE WITH SHEFFIELD

By JOEL SHERMAN

August 6, 2006 -- DOWN THE LINE

Once the Yanks obtained Bobby Abreu, the natural inclination was to assume they would not pick up Gary Sheffield's $13-million option for 2007. But they are seriously contemplating doing just that. Not for him to play first base or DH. But to trade him.

The free-agent market is going to be thin again with the main outfield sluggers likely to be Jermaine Dye, Carlos Lee and Alfonso Soriano. There will be more than three teams who need an outfield bat and there will be more than three teams who simply cannot afford to get into the five-year, $75-million range it is likely to take to land Lee or Soriano. Sheffield (who even has $4.5 million deferred next year) can be an alluring alternative on a one-year deal. If they simply do not pick up the option, the Yanks would lose Sheffield for nothing. Here, even if they accepted, a second-tier prospect or two, it would be more than they would get otherwise and help deepen their hurting system.

But one AL executive cautioned, "My guess is that is a dangerous game to play, especially since they have Abreu's salary on books. If Sheffield goes off in the last two weeks of September or the postseason, then I might do it. But if they get stuck with that salary or paying a big chunk to trade him, that would be a bad move, and you are talking about a player who is in his late 30s, who is coming off a major injury and has had his power production decline in recent years." However, another AL executive said, "I believe someone would take him for a year, but the deal would have to be worked out ahead of time" and cited the Angels, White Sox and Giants as possible landing places.
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I'd agree that signing Lee to a long-term contract would be a huge mistake.  I'd be much more excited about making a deal with the Yanks for second-tir prospects and getting a couple of 1st round draft picks for Lee.