Scenarios

Theory is useful, but concrete examples make the protocol click. Below are realistic scenarios for both borrowers and lenders, illustrating how Spout performs across normal markets, strong rallies, assignment events, and the rare case where the loss waterfall is touched.

These scenarios use simplified, illustrative numbers. Actual outcomes depend on market conditions, strike selection, and cycle timing.

Borrower Scenarios

Steady Growth (TYPICAL)

  1. 1.Alice deposits 100 shares of NVDA (worth
    20 each,
    2,000 total) and locks them as collateral.
  2. 2.She borrows $6,000 in stablecoins (50% LTV) at 0% interest.
  3. 3.Over the next four weekly cycles, NVDA drifts up gently. All cycles expire worthless — the covered calls generate premium without assignment.
  4. 4.Alice repays the $6,000 whenever she likes, unlocks her shares, and walks away with her original NVDA position intact plus any price appreciation.

Outcome: Alice kept her shares, paid no interest, and her collateral earned premium the entire time.

Strong Rally (UNCOMMON)

  1. 1.Bob locks AAPL shares and borrows stablecoins against them.
  2. 2.The engine skips the cycle that overlaps AAPL's earnings release, so Bob is not exposed to the earnings gap.
  3. 3.AAPL jumps 5% in the following week on post-earnings momentum, but the strike was set above the move. The call expires worthless.
  4. 4.Bob captures the full 5% upside on his collateral, keeps the premium, and continues borrowing at 0%.

Outcome: Earnings skip protected Bob from gap risk, and the strike selection let him keep the rally.

Assignment with Auto-Roll (BOUNDED)

  1. 1.Carol locks MSTR shares. The engine writes a covered call at a strike 8% above the current price.
  2. 2.MSTR rips 12% in the cycle. The call is in-the-money and the shares are sold at the strike.
  3. 3.Proceeds first clear Carol's outstanding debt. The residual is used to rebuy MSTR at the current (higher) price because Auto-Roll is on.
  4. 4.Carol ends the cycle with slightly fewer shares (because the rebuy is at a higher price), but her position is automatically re-enrolled and productive again.

Outcome: Assignment is bounded. Carol captured the premium and the upside to the strike. She missed the last 4% of the rally but her position auto-restored.

Market Decline (RISK EVENT)

  1. 1.Dave locks NVDA and borrows at the maximum 50% LTV.
  2. 2.NVDA drops 15% in a broad market selloff. Dave's Health Factor falls below 1.00.
  3. 3.The protocol triggers a partial liquidation, selling just enough collateral to restore the Health Factor above 1.00. The 5% liquidation fee applies to the collateral sold.
  4. 4.Dave still holds most of his position. The liquidation was surgical, not a full wipeout. He can add collateral or repay debt to prevent further liquidation.

Outcome: Borrowing at max LTV leaves little buffer. Dave lost some collateral to liquidation but kept the majority of his position. The lesson: leave headroom.

Lender Scenarios

Consistent Yield (TYPICAL)

  1. 1.Eve deposits $50,000 in stablecoins into the Senior lending tranche.
  2. 2.A portion sits idle and earns base yield from the onchain money market. The rest backs active borrower positions and earns a share of the weekly options premium.
  3. 3.Every Monday, Eve receives her distribution. The blended APY tracks above the money-market-only rate because of the premium layer.
  4. 4.Eve can withdraw instantly from the reserve, or join the FIFO queue if the reserve is depleted. No lockup, no exit fee.

Outcome: Steady, predictable income from real options premium. Eve's principal is intact and earning more than a plain money market.

High Volatility Period (FAVORABLE)

  1. 1.A geopolitical event spikes implied volatility across the board.
  2. 2.Options premiums rise sharply. The engine continues writing covered calls at the elevated premium levels.
  3. 3.Lender distributions for those cycles are meaningfully higher than average. The VRP widens when fear is high.
  4. 4.As volatility normalizes, premiums return to baseline, but the elevated weeks permanently boosted the cumulative return.

Outcome: High-vol periods are favorable for covered-call sellers. Lenders earned above-average yield precisely when the market was fearful.

Cycle Loss Event (EDGE CASE)

  1. 1.A single asset has a cycle where assignment cost exceeds the premium collected, producing a net cycle loss.
  2. 2.The insurance fund absorbs the loss entirely. It was sized for exactly this scenario.
  3. 3.Lender principal is untouched. The Monday distribution for that cycle is zero for the affected asset, but positive for every other asset that closed normally.
  4. 4.The insurance fund begins replenishing from the next cycle's premium slice. Normal operations resume.

Outcome: The waterfall worked as designed. Lenders earned zero on one asset for one cycle but their principal was protected.