OK, So Bodes Was Right...
I got it wrong. Bodes was right. Vargas was out of options, despite only using one of his options.
They key point I missed is that he was initially placed on the 40-man roster in 2001. Once you're on the 40-man roster, you have three years worth of options. However, if you never appear in the majors during one of those seasons, you get a fourth option year.
That final season of option-eligibility would have been in 2004, meaning he was ineligbile to be optioned in 2005, even though he had not used all three available years. Makes sense?
1) Major League Baseball does a horrible job of distributing this information. There is no central location for these sorts of roster rules, or the actual transactions. What I've learned about options and the rules has been through trial and error, and things I've read. I've never seen an official written policy. Additionally, there aren't accurate public records of transactions. Given the length of time he was in the minors I should have known that he would have been put on the 40-man roster in 2001, but good luck finding that sort of information from an authoritative source.
That's something that baseball really need to provide access to. (Service time would be another useful blip of data, especially when it comes time to determining free-agent eligibility.)
2) This isn't meant to come across as sour grapes, but my larger point about Bowden's difficulty with the roster remain. In my post that I linked above, I talked about how Vargas wasn't completely over his elbow injury. There were other options. He didn't have to waive a relatively young pitcher, especially one with some upside.
But given how wrong I was the option thing, who am I to criticize?
An emailer asked for a clarification. To be technical a player who's on the 40-man roster for an entire season but who isn't on the active 25-man roster is technically using one of his option years. It's just that when the player doesn't appear on the active roster for an entire season, he is granted a fourth option year. Transaction rules suck!