Option 1 is cleaner and a more direct visual translation of "this OR that".
If you added a 'Mode' label like other controls it would be more descriptive and recoup some of the benefit of the long form option.
It's interesting the second option is given a lot more visual prominence with color and size. What is the goal here? If it's a new feature / major mode and other buttons are secondary you could still do a treatment more like 1 but use color / size / style to make it more prominent.
Certainly if users are missing the mode option then a more prominent treatment is in order. I would still question a very wordy control. See the mode selector treatment for InvisionApp (prototyping tool) below. They make selected mode visually prominent. All other controls are represented in a muted color. Rather than take up screen real estate with explanatory text it is revealed on hover for user orientation.