March 5 (Reuters) - Those using FX options to cover a break-out from EUR/USD's recent 1.04-1.05 range have made a significant profit which would have been similar no matter which direction the break-out occurred - here's how.

FX options thrive on volatility and rapid directional moves, which are unknown in advance but key to the options premium. Dealers use implied volatility as a stand-in. Any disparity between implied and actual/realised volatility becomes tradable, as does any movement in implied volatility.

EUR/USD implied volatility fell to longer term lows in mid February, before meeting mild demand and remaining supported thereafter. This suggested that implied volatility was less likely to lose more ground and more likely to edge higher once EUR/USD started to move again.

A plain 3-month expiry vanilla straddle option had an implied volatility around 7.15 at that time - a premium of 2.85% of EUR or 304 USD pips. Buyers would have owned the right to either buy or sell EUR/USD at a set strike and expiry date. However, as a volatility play, the option holders would avoid any currency exposure by adjusting a related cash hedge on a daily basis to keep the option delta neutral.

EUR/USD implied volatility has surged higher with spot in the last 24 hours and consequently increased the premium for all EUR/USD FX options. That 3-month expiry implied volatility is now 8.0 and its premium has increased to 3.26% of EUR or 349 USD pips.

For a typical FX option trade of 30 million euros, the difference between 7.15 and 8.0 implied volatility on a 3-month straddle expiry equates to a profit of around 125,000 euros.

Selling vanilla options works in reverse and maybe the next strategy that traders employ if they think that the EUR/USD spot rally has run its course for now.

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(Richard Pace is a Reuters market analyst. The views expressed are his own)