Wednesday, 12 December 2012

What's the deal with NominOptions?

Let's start with the basics.  NominOptions are derivatives based around the upcoming Oscar nominations.  You want to pick which films, actors, directors and writers will receive Oscar nominations - and just as importantly, which ones will not.

Obviously NominOptions are only traded at one time of year - in the lead-up to the Oscar nominations in January.  After the nominations are announced, HSX will also IPO AwardOptions, but the NominOptions are the more lucrative of the two because (a) there are more sure bets for nominations than there are for Oscars and (b) there are more potential Oscar nominees than there are actual Oscar nominees.

NominOptions are available for the big eight Oscar categories - Best Picture, Best Director, Best Actress, Best Actor, Best Supporting Actress, Best Supporting Actor, Best Original Screenplay and Best Adapted Screenplay - and there are twelve NominOptions in each category.  NominOptions are availabe at IPO for $5 each, and the ones for those films/actors/directors who are nominated will cash out at $12.  The ones that do not, cash out at zero.

The exception here is Best Picture.  Since the Academy decided that Hollywood's annual output is of such exceptional quality that up to ten movies can be nominated for Best Picture, you can expect around 20 Best Picture NominOptions.  They also IPO at $5, but the cash out value for the nominees will depend on how many nominees there are.  The fine print is available on the relevant NominOptions pages.  Non-nominees obviously cash out at zero.

Obviously, you should buy the NominOptions for the films/actors/directors that get nominated, and short the ones that do not.  You will need about H$5.2 million to invest in every NominOption.

There are several strategies for playing NominOptions.  The two main ones are to play the favourites, and to play the players.  These strategies are inter-related, and you probably want to combine the two.  Let's start with playing the players first.

Nominoptions move fairly quickly after they IPO, when interest is highest.  There'll be smaller bursts of activity as other awards news comes in - like the nominations for the Golden Globes and for various guild awards - or as movies that people are only talking about now are seen by critics and audiences.  If a movie does well at the box office, its nomination chances will improve.  And interest will pick up again as the Oscar nominations draw closer.  Also, there is more trading activity on the NominOptions for high profile awards like Best Picture than there are on the ones for minor technical awards, like Best Adapted Screenplay.

But the most important part of playing the players is picking which NominOptions other traders are going to buy and which ones they will short.  And that involves playing the favourites, which takes some research.  Not a lot, but some.

A good place to start is to see what directors, actors and writers have been nominated or awarded in their annual guild awards.  These come out in December and early January.  Here are links to the major peer awards:
You can also look at what films have been nominated/awarded by the major critics groups.  Here's a non-exhaustive list:
Of course, predicting the Oscars is a little mini-industry of its own, and there are plenty of websites that try to predict the Oscar race and Oscar favourites.  Come Oscar season, they track developments such as the other awards, festival and critical buzz and studio campaigning and provide their own analysis of the chances for the leading contenders.  Some sites that do this are indiewire, Rope of Silicon, Awards Circuit and Gold Derby.

There is a third strategy for making money from NominOptions, and that is through arbitrage.  For seven of the eight categories, the relevant NominOptions have a combined cash out value of $60.  As the NominOptions are traded and their prices move, their combined price will inevitably differ from their combined cash out value.  If the combined price for a NominOption category is significantly under $60, you can buy all the NominOptions in that category for guaranteed gains.  Or if the combined price is significantly higher than $60, you can short them all for a similar result.

This isn't a very good strategy, for three reasons.  First, the combined price is never going to deviate from the cash out value by more than a couple of dollars, so expect any gains to be small.  Secondly, trading NominOptions is not that difficult, and while you would be making a small, risk-free gain, you are giving up the opportunity for a much larger gain that isn't really much of a risk.  The third reason is that it's a tedious, mechanical strategy that doesn't give you the same enjoyment as actually picking the nominations correctly.  So it is not recommended.

There's even a fourth strategy, which only kicks in when trading is well underway.  Sometimes, Nominoption prices get ridiculously high or ridiculously low, and the Oscars are full of surprises.  It can be worth keeping an eye on prices, and buying any NominOptions priced under a dollar in the hope that one pays out big, or shorting any that reach a price above their maximum cash-out value (plus commission).

This should be far too much information to assist you in your NominOption choices.  Good luck in the coming Oscar season.

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