What is to stop someone from first buying a bunch of OTM puts and then selling short enough stock to make the puts go up high enough to make a profit? Or conversely, buying OTM calls and then buying a bunch of stock?
The quick answer is: There's no such thing as a free lunch, the no-arbitrage principle.
The longer answer:
To push the price down, you must short a massive amount of shares relative to float (tradeable shares). Don't forget that to have a short position, you must actually sell the shares. If you short large volume, then the market price will go down, but so will YOUR selling price.
This means your average selling price relative to normal volume trading is low. Remember that profit on a short position is: sell price - buy price. You must buy back the shares to make a profit. Since the price is artificially low, it is likely to rebound as others (most likely algorithms) will spot the sudden price lowering for no reason and buy the shares at bargain prices. The price will quickly rebound. Even if you were quick on your toes and sold the put options at a profit, you must still buy back the shares at higher prices than you sold at.
This strategy will result in huge losses. If it were to be a profitable strategy, it would not be because the market would spot the mispricing and correct for it. Otherwise, arbitrage would be possible.
Note selling huge quantities of shares is not illegal in itself. But fake trades and false information to manipulate prices is.
You may be interested in looking up the Flash Crash of 2010. The accused trader made profit by manipulating prices, close to what you were asking. The difference is he put in massive fake trades in order to drive down prices. The trades were "fake" as they were never executed. He would put in massive quantities of sell orders on futures, but above current market prices, giving the allusion people were dumping shares. This drove the price down.
This is a much better strategy than shorting shares as you propose. The only problem is you won't get to enjoy your millions from a jail cell ;)
Is the stock so easy to manipulate? How much does she need to spend to drive the price against her, far enough to pass the strike and make a profit? For a stock that is that thinly traded to be manipulated, is there sufficient liquidity in the options market? What about the hedging positions of the guys that sold options to her?
It is also most probably illegal.