The trouble is that it doesn't have to be a huge contract. All it needs is one team to offer slightly higher than what we can offer, and we lose him.
I don't know what the plan is. Perhaps the FO thinks we already have a crowded front court, and Giles might not fit into it, particularly for the role they have in mind. Overall though, the cost for retaining him was very low, and I doubt we can make better use of the money we will save from not picking the option. Due to our mismanagement, we have lost lot of talent for no compensation, losing guys like WCS, Mason, Skal, and probably Giles for no compensation (ignoring Caleb as compensation here). While it might be argued that none of them have set the league on fire, it may be a bit early to say that. Remember HW took a few years after he left us, and even IT, even though he was a good player with us, and with Denver, became really dominant in Boston. IIRC, we lost both of them too for no compensation.
Finally, Giles didn't come cheap. We traded down to pick him and JJ, when we could have picked Mitchell. I know it's easy to be wise in hindsight, but most of us had supported the move that time, since we believed JJ could be a decent role player (he seems to be making some progress there) at a position of need. However, the real prize there was Giles, who was a potential top prospect. While the JJ for Barnes trade was good (one can argue about the contract given to Barnes separately), but losing Giles for nothing would be horrible.
Finally, I don't get to watch a lot of games, so probably unfair to make this comment. However, I think the team needs more players who play with an edge, and I think Giles did that. Another reason I would hate for him to go. While his health will always be a question, till he proves otherwise, I still think he has the tools to be an excellent player.