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1) I think that it is a good movie

2) I think that is a good movie

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    Both are fine. The second version can be extended to "I think (that) that's a good movie."
    – Mohd Zulkanien Sarbini
    Mar 23, 2017 at 23:15

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They're both grammatical, but they don't mean the same thing.

In the first one, "that" is a complementiser, and the subject of the embedded clause is "it".

In the second one, the complementiser is omitted, and "that" is the subject of the embedded clause.

So the embedded clauses are respectively "it is a good movie" and "that is a good movie". While in some contexts these may be interchangeable, in general they have a different meaning, because "it is a good movie" relies on there already being a movie in the discourse, whereas "that is a good movie" does not: it is (somehow) specifying the movie by notionally pointing to it, rather than by picking it up from the existing discourse.

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