March 7 (Reuters) - Investors looking to gain exposure to EUR/USD without committing to a spot trade might consider FX options, which limit risk to an upfront premium.

A EUR call/USD put option grants the holder the right, but not the obligation, to buy EUR/USD at a predetermined strike price on a set expiry date. However, the recent surge in EUR/USD to fresh highs since November has significantly increased option premiums. Implied volatility, a key factor in option pricing, is now at its highest levels since January, and the premium for upside strikes over downside strikes has reached levels last seen in 2022 and 2020.

One way to reduce the cost of EUR call/USD put options is by adding a knock-out (KO) trigger above the strike price. Since a KO trigger renders the option worthless if touched before expiry, it lowers the premium as the likelihood of it being hit increases.

For example, with EUR/USD spot at 1.0850, a three-month expiry 1.1000 EUR call/USD put costs 132 USD pips, meaning it turns profitable if EUR/USD rises above 1.1132 by expiry (June 9, 10 AM New York time). However, introducing a KO trigger at 1.1500 reduces the premium to 42 USD pips, while lowering the trigger to 1.1300 further cuts it to just 11 USD pips.

In this scenario, the break-even level would be 1.1011, but profit potential is capped at the KO trigger, and the option becomes worthless if the trigger is hit before expiry.

An alternative strategy is a EUR call/USD put spread, which involves selling a higher-strike EUR call/USD put to offset the cost of purchasing a lower-strike one. This keeps the option active until expiry while reducing the initial outlay, though profit is limited to the upper strike. Strikes and maturity dates can be tailored to suit.

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