I would grab the toy is his mouth but instead of tugging make the toy go limp and give the out command. All the while have another toy in your other hand and make that toy jump and move. He'll eventually want to play with the fun toy and not the limp toy. When he grabs onto the other toy then play tug with him. Dog is smart. He'll learn quickly what out or drop it means.
I will say that the dog should want whatever is in your hand. A toy, a rag, or a shoe etc. If you play tug and once he "wins" and runs off with it instead of giving it back to you then you should take a step back and rethink engagement training. He should think you are fun, not the toy.