Nvidia & Palantir: What the options market is signaling

00:00 Speaker A

Well, tech concerns weighing on markets as investors debate whether tech valuations are just too lofty. Recently hedge fund manager Michael Burry, who correctly predicted the subprime mortgage crisis, remember, disclosed bearish wagers on AI trade favorites, Nvidia and Palantir. For a closer read on tech and options trades, we’ve got Title Financial Group, field macro strategist Mike Coe joining us now for the Options Playbook sponsored by Tastytrade. Mike, it is great to see you. You know, interesting, Mike, maybe we’ll start kind of broader here. Um, you’ve been watching the markets a long time, Mike. You’re a veteran. and we were just talking to Qualcomm CEO Cristiano Amon about this. a big debate right now. Maybe it’s the debate, Mike, is this question of of AI boom or AI bubble? And I’m curious, Mike, just to get your take on that. What do you think?

01:03 Mike Coe

Well, uh, I think it’s definitely a boom. that’s undeniable. I mean, we can we can just see that in the in the level and scale, not only of what the stocks have done, but the spend and the revenue growth that we’ve seen in these respective companies. I mean, they the profitability, top-line growth, scale, scope, margins, all of those things with names like Nvidia, we really haven’t seen that kind of thing before. I mean, we’re looking at better than 50% net income margins after taxes with annual growth rates that are, you know, they were over 100% at one point. Obviously, it’s slowed down a little bit since, but it’s hard just because of the laws of large numbers for it to continue to grow at the pace that it was.

01:54 Mike Coe

But it is quite incredible. Now, the the concern that it’s a bubble, having lived through a couple as you reference, you know, in the tech wreck, so I’m referring now to, you know, the period around the .com, late ’90s, early ‘0s. Uh that was a little bit different because you had companies that didn’t have meaningful revenues in some cases, certainly didn’t have legitimate earnings. And even those that did have very good earnings, like Cisco, which was the poster child for that era, were trading at multiples that we are not seeing today. Cisco was trading at more than 200 times earnings at its peak. Nvidia is closer to 30. So, it’s it’s hard to say that it’s the same kind of bubble. That that said, uh there’s obviously a great deal of enthusiasm here, and if CAPEX slows, that’s probably going to weigh on companies like Nvidia pretty hard, but there’s no sign of that slowing, at least not through the end of 2026.

02:51 Speaker A

Let’s get to two AI names, uh, Mike, I want your take on. So Nvidia and Palantir making news. I’m curious, Mike, to to get your take. What did you make of the Michael Burry disclosures with those names and what are you seeing in the options markets with those names?

03:13 Mike Coe

Yeah, I mean, these are two very busy single stocks with respect to options. I I should mention we have very substantial positions in in both of these, actually, probably a little over uh two billion in these in these two stocks combined. Um, you know, it’s it one thing I would point out, um, as you look at that, first of all, when you see that huge short position, just bear in mind that that’s the notional exposure if all of those options converted to stock, right?

03:52 Mike Coe

So, when you look at the at the Palantir trade, for example, um, you know, or the Nvidia trade, one of those is I think 10,000 contracts in the aggregate, which would represent a million shares. But that doesn’t mean that he’s actually short 200 million notionally of the stock right here. The other position, um, in is substantially larger, the Palantir position, uh if it all converted to stock would be close to $900 million. But when you buy options, you’re you’re putting out a smaller amount of premium to make a bearish bet, and then if the stock falls, you have the right to sell it at the strike price.

04:31 Mike Coe

But these are very big bets for a fund of his size, it should be said. It’s interesting. I don’t put these two into the same category. Um, specifically Palantir, even net of its sharp declines that we’ve seen in recent days. And I know Alex Karp was unhappy with how the stock performance, um, you know, was behaving basically after they reported earnings. But you know, it’s trading at 100 times revenues. That that’s a pretty rich multiple, no matter how you slice it. I don’t think the market’s treating him unfairly.

05:10 Mike Coe

There’s no bear raid going on in the stock right now. But it’s a rich valuation. So I can kind of see where Michael Burry is coming from on that point. On the Nvidia trade, which is smaller, uh the multiple is is actually not outrageous given their current growth trajectory. Um it it’s actually cheap, one could argue relative to the market. So I I look at these two things differently. I think it’s more of a beta play. You know, you buy some puts, these are the high beta names.

05:37 Mike Coe

If things roll over, even if you got just a correction, forget about a bear market, just a correction, these stocks will be down more than the market overall most likely, and those puts will probably be profitable.

05:44 Speaker A

All right, we’re talking AI. I want your your take, Mike, on another big theme, which is crypto. I’m curious just to get your sense one, of the moves we’re seeing there and two is, I’m just looking at Bitcoin here, Mike. You know, would you be buying here?

06:01 Mike Coe

Yeah, so we we have positions in in several crypto names, it should be said. Uh, we have positions in IBIT, which is the uh ETF that tracks Bitcoin. We have considerable positions in MicroStrategy, uh, which obviously is closely correlated. They’ve got about 640,000 Bitcoin on their balance sheet right now. Um, you know, I would not be buying it right now though. I we’re, you know, adding to it’s a little bit difficult. You want to see this current period of weakness start to reverse.

06:45 Mike Coe

You want to see a bearish to bullish reversal. It’s below its long-term trend line right now. There’s clearly a little bit of concern and the time to really decide that you’re going to get a aggressive and buy dips aggressively is when you see the the flush, the absolute fear. So whether that’s the broad market, the VIX is over 25, something like that. Um, that indicates that, you know, there’s that last rash of panic selling. That combined with really heavy volumes.

07:18 Mike Coe

But when something’s in a steady downtrend, you know, we call that trying to catch the falling knife when you reach out and try to buy something where the the momentum is just not in your favor and at the moment, it isn’t quite yet.

07:35 Speaker A

Mike, always great to see you and to have you on the show. Thank you, sir.

07:40 Mike Coe

Thank you.