How are they earning money in the movie "Trading Places"?

Question

I was watching a movie called "Trading Places" and it's about stocks. I need help because I don't understand stocks yet. A stock was for 142-146 that was the highest then when it reached the highest a guy said Sell 200 at 142. What does that mean? And it was going down little by little down all the way to 29. A guy knew what was going to be the outcome so he was buying low like a lot. But how does he earn money?? He buys them low and he is wasting money because he is just buying low. And stocks closed. How does he earn money?! Stocks never went up.

Answer 1

They are not selling stocks. They are selling OJ futures contracts. Selling a futures contract at 142 gives the buyer the right to buy a fixed number of pounds of orange juice concentrate ("OJ") on a future date at 142 cents per pound. The seller has an obligation to supply that fixed number of pounds of OJ to the buyer on the future date for 142 cents per pound.

When the seller turns around and buys futures contracts at 29, the seller gets the right to buy OJ on a future date at 29. This "zeros his position" -- meaning he's guaranteed himself the ability to deliver the pounds of OJ he was obligated to supply when he sold futures contracts at 142. And since he'll only have to pay 29 cents per pound, and he'll be selling the OJ for 142 per pound, he'll walk away with 113 cents of profit for every pound sold.

You can read a blow-by-blow account of what Winthorpe and Valentine did at the end of "Trading Places" here and here. Note that what they did would not be legal today under the "Eddie Murphy rule", which prohibits trades based on illicitly obtained government information.

Answer 2

Sell 200 at 142. What does that mean?

I haven't seen the movie, so I won't try to put anything in story context. "Sell 200 at 142" means to sell 200 units (usually shares, but in this case it would likely be gallons or barrels of orange juice or pounds or tons of frozen juice).

In general, this could mean that you have 200 units and want to sell what you have. Or you could borrow 200 units from someone and sell those--this is called a naked short. In this case, it seems that what they are selling is a futures contract. With a futures contract, you are promising to obtain orange juice by some future date and sell it for the agreed price. You could own an orange grove and plan to turn your oranges into juice. Or you could buy a futures contract of oranges to turn into juice. Or you could arbitrage two futures contracts such that one supplies the other, what they're doing here.

In general people make profits by buying low and selling high. In this case they did so in reverse order. They took the risk of selling before they had a supply. Then they covered their position by purchasing the supply. They profited because the price at which they bought was lower than the price at which they sold.

The reason why this is necessary is that before buying the oranges, the orange juice makers need to know that they can make a profit. So they sell orange juice on the futures market. Then they know how much they can afford to pay for oranges on a different market. And the growers know how much they can get for oranges, so they can pay people to water and pick them.

Without the futures markets, growers and orange juice makers would have to take all the risk themselves. This way, they can share risks with each other and financiers. Combined with insurance, this allows for predictable finances. Without it, growers would have to be wealthy to afford the variation in crop yields and prices.