It’s the final trading day of the week. By the time you receive this, many investors will have already left for their Memorial Day weekend celebrations. Good for you. You’ve earned it.
This past week’s trading hasn’t been great, although the S&P 500 was up 0.8% at midday on Friday. There’s a chance the index will finish the past five days of trading in positive territory, keeping its winning streak alive.
Deckers Outdoor (DECK)leads the way, up 13%, on strong Q1 2024 results. The maker of Hoka and UGG footwear delivered an 8% revenue beat ($960 million) and a whopping 65% earnings beat ($4.95 a share) in the first quarter. Its gross margin was 56.2%, 620 basis points higher.
It’s no wonder the stock’s up 133% over the past year. But I digress.
It's Friday, so I’m here to talk about unusual options activity. Two calls from Thursday’s options trading. It just so happens both expire in approximately two-and-a-half years (939 days).
They are two of the Magnificent Seven: Nvidia (NVDA)and Tesla (TSLA). With their expiration a week before Christmas 2026, I don’t think there’s any question about which is the better buy.
Have an excellent Memorial Day weekend!
The Options in Question
As I said, the two call options expire in 939 days on Dec. 18/2026. Nvidia and Tesla’s strike prices are $1,100.00 and $230, respectively. The former’s Vol/OI ratio was 1.41x, while the latter’s was 1.72x. That's nothing to write home about regarding volume, but it is unusually active nonetheless.
Nvidia’s ask price at the close was $329.55, a 30% down payment on 100 of its shares. Tesla’s ask price was $49.50, a 22% down payment on 100 shares. With 2.5 years to expiration, they’re both reasonable bets based on current share prices.
Nvidia stock closed Thursday trading at $1,037.99. That means its share price must rise by at least $391.56 (38%) for you to consider exercising your right to buy 100 NVDA shares. Tesla stock closed yesterday’s trading at $173.74. If you want to exercise your right to buy 100 TSLA shares, Tesla's share price must rise by $105.76 (61%) to contemplate exercising your right.
While the initial outlay for the right to buy 100 Nvidia shares is nearly four times what you’d have to put up for Tesla, here’s why its call makes more sense.
Both Have Great Financials
According to S&P Global Market Intelligence, as of April 28, Nvidia had a net cash of $20.45 billion. That is $3.5 billion (21%) higher than Tesla’s net cash position of $16.95 billion on March 31.
When you’re talking about multi-trillion or billion-dollar market caps, that’s not a massive gap, but it is a difference, so that’s something to consider.
In the last 12 months ended March 31, Tesla’s revenue has grown by 10.1%, while its earnings per share rose 18.7%. Both are healthy increases. Over at Nvidia, its revenue has grown 208.3%, while its EPS grew by 791.6% year-over-year.
These are ridiculously high year-over-year growth rates. There’s no way Nvidia keeps growing at this pace. However, it should be able to keep growing the top and bottom lines by more than 20%. Tesla’s business is in a reset year. While it’s hard to know where it will go in terms of profits in the next two or three years, it’s clear that its profit situation should improve in 2025 and 2026.
The tricky part for Tesla is that it sells itself as a tech company that happens to make cars. However, its most recent gross margin of 17.8% is one-fourth of Nvidia’s at 75.3%. Now that’s a tech company.
The one thing you can hold against Nvidia is its recent financial results, which are historically unprecedented. As a result, when the semiconductor industry takes a break from growth, its results will be hammered, significantly affecting its share price.
Barchart.com's analyst data shows that of the 32 analysts covering Tesla stock, only 10 rate it a Buy (3.19 out of 5), with a target price of $176.45, below where it’s currently trading. Meanwhile, 36 of the 39 analysts covering Nvidia stock rate it a Buy (4.79 out of 5). The target price is $1,013.63, below where it’s trading.
There is no question that these two businesses are currently travelling in different directions.
And the Winner Is?
The great thing about buying call options is that you can make money even when the underlying stock’s share price doesn’t appreciate enough for you to seriously consider exercising your right to buy by selling them before expiry.
In Tesla’s case, the delta was 0.59444, so you could double your money by selling the call before expiry if the share price increases by $83.27 (48%) before Dec. 18, 2026. Nvidia’s share price, on the other hand, has to increase by $486.36 (47%) over the same period.
A lot can happen in 30 months. That’s why I mentioned the cyclical nature of chip stocks such as Nvidia. It can be great for a time, and as fast as you can blink an eye, it can be equally bad. Whereas, in 3o months, the demand for EVs should be higher than it is today because people will always need cars.
However, I don’t want to say, “This time it will be different,” because that’s the kiss of death; I think AI is as generationally important as the smartphone, perhaps even more so.
So, even though your initial outlay is four-fold higher for Nvidia, I do see it as the better call option to buy for long-term gains.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
