The Oscars have been handed out, and the final bow has been taken by film industry for the 2009 season. But for the small group that make movies, and the much larger group that watch them, a new season is underway. The standard definition for success is how much money a movie can make at the box office, and thanks to the constant innovation of the financial markets, now you can place bets on movies alongside studio execs, directors and film financiers. (Find out what effect institutional investors have on the stock market and individual traders, in The Market Participant Playbook.)
The Hollywood Stock Exchange
Pending regulatory approval, futures broker Cantor Fitzgerald hopes to offer real money trading on movie futures beginning in April 2010. Cantor got into this market by purchasing a popular website called the Hollywood Stock Exchange. The site, which has over a million existing users, lets people buy or sell futures on current movie releases and future openings.

It works like this: Each movie has its own contract, and the price of that contract is based on the current market consensus of how much the movie will earn over the first four weeks after the initial release. A big hit like Tim Burton's Alice in Wonderland has been cleaning up at the box office, beating even the most optimistic revenue forecasts.

Futures holders for Alicehave profited greatly; contracts soared over 150% in the week of the movie's release. Once the first weekend's ticket sales were in, the contracts had priced in this success, just like S&P 500 futures change in real time as the market moves. Dud movies, meanwhile, will see their contacts lose value as initial hype gives way to the reality of poor reviews and/or ticket sales. As such, investors can profit from either the success of a movie (buy going long) or bet against a movie by going short, or betting that the price of a contract will fall.

Contracts pricing is based on 1/1,000,000th of the total Domestic Box Office Receipts (DBOR) collected during the first four weeks after the movie's opening. If a movie stays in the theaters longer than that, any ticket sales will not count towards the value of the futures contract. So if a movie earned $85 million during the first month, the contract would "close out" (expire) with a value of $85.00. (The glitz and glam of Hollywood could help put some more glitz in your pocket. Find out how, in Analyzing Show Biz Stocks.)

The Switch from Play to Real
Currently, the Hollywood Stock Exchange is operating as an entertainment only site, with "play money" being used. But all the functionality is there, and Cantor Fitzgerald is hoping to make a seamless transition to real money trading using the existing functionality, the existing pricing mechanisms, and the site's popular platform. Once final approval is granted for real money trading, the Hollywood Stock Exchange will likely stand alone as an "entertainment" site - with only play money being used - while Cantor will piggyback the site's features to create a separate entity for real money trading.

Overall, the site works well, and can be picked up quickly even if you are unfamiliar with trading futures or other derivative contracts. Trading on movie futures is going on 24 hrs a day, seven days a week. At any one time, there will be an extensive amount of contracts trading, including all the movies currently in the theaters and future films for which the release date is known. This time of year you can find contracts for most of the summer big budget "blockbusters," although the word only implies that a lot of money went into making these films, not that they will earn a fortune in the box office.

Price volatility on the individual futures will tend to spike as the release date gets near. The week of the movie's release is when the proverbial rubber begins to hit the road. Reviews on the movie will get printed in newspapers and read over the internet. Advance ticket sales will be purchased online, and buzz begins to either build or dissipate. What may have been a ballpark estimate for a movie's gross two months ago will become much more tangible two days before the opening weekend. (Learning about stocks is as easy as playing a game. Get started today by reading Stock Market Simulators: Play Your Way To Profits.)

Who Will Participate?
Cantor hopes that movie futures trading will attract the kind of interested parties that you typically find in other futures. Just like a farmer may trade in corn futures to protect the price of his harvest, a film producer may trade in movie futures to hedge against his financing costs. Meanwhile speculators - folks like you and me - will take the other side of those trades, using whatever information we have available to make our choices – movie trailers, the director, the actors or the basis for the script. In the internet age, movie futures seem perfectly suited to the type of creative research required to make this type of investing profitable.

Cantor is also hoping to attract some of the hedge fund crowd, the type of investor that craves anything new and anything that may have weak correlations to typical investor buckets, like the stock and bond markets.

And the Winner is …
Assuming the Commodity Futures Trading Commission (CFTC) approves Cantor's application in April, folks who want to bet on the movies will have to apply for a real money account just like they would to trade futures in corn, soybeans or crude oil. Some hedge fund traders are already predicting that, in the beginning, there will be some market inefficiencies in movie futures. A general rule of all markets is that the fewer the number of participants, the more likely it is for there to be some early volatility in price movements. This is mentioned as both a warning (to the risk averse) and an opportunity to the risk-friendly.

Still feeling uninformed? Check out last week's Water Cooler Finance to see what's been happening in financial news.

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