A common and oft repeated belief regarding options volatility is that implied volatility increases due to people bidding up a contract, usually related to anticipation of the outcome of an expected event. After the event, volatility drops because more people are selling the contracts.
But I have noticed contracts with ZERO volume with an increase in IV, and after the event those same contracts with ZERO volume now are quoted at lower prices after IV has dropped. The only market participants that are "bidding up" or "bidding down" are the market makers, and they never fill each other, just change their quotes.
The fallacy is that nobody is interested in those contracts therefore IV should not increase. The market makers' computers simply change their bid and ask because the IV has changed, not the other way around.
Is there a more comprehensive options volatility study I can read that more accurately addresses change in volatility? I have reservations about what is commonly said about volatility vs what I see in the market.
On these illiquid contracts, perhaps the long standing idea of implied volatility is simply of no use here, and if people really think these contracts are worth what they are, then the portion of the contract's price that is based on IV should be spread out amongst the other variables, mainly theta.