As traders and investors, we often focus on the potential profits of a trade without fully considering the risks involved. One such risk that has recently come to light is the potential for massive oil longs held by CTAs (Commodity Trading Advisors) to trigger aggressive selling from momentum chasers. This phenomenon has the potential to turn a relatively orderly pullback into a much nastier unwind, with serious consequences for those involved.

In a recent chart from GS, we can see the extent of these long positions. The chart shows a massive buildup of oil longs, with a concentration of positions in the $60-70 range. While this may seem like a lucrative opportunity for those with a bullish outlook on oil, it’s important to consider the potential downside risks.

One key risk to consider is the concept of downside convexity. Essentially, this means that the potential losses from a price move lower are greater than the potential gains from a price move higher. In the case of these oil longs, the potential losses could be significant, leading to aggressive selling from momentum chasers who are eager to lock in profits.

This selling could have a domino effect, with other traders and investors following suit and driving the price of oil even lower. The result could be a rapid and unpredictable price move that catches many off guard.

So what can traders and investors do to protect themselves from these risks? One key strategy is to diversify their portfolios and avoid concentrating too heavily on any one asset class or sector. This can help to reduce the potential impact of any one trade or investment, should it go awry.

Another strategy is to carefully consider the potential risks and rewards of any trade or investment, and to be prepared for the potential consequences. This may involve setting stop-loss orders or other risk management tools to help limit potential losses.