Aside from the convexity of implied vol and the consequences that carries, here are some other thoughts:
Market makers don't have a dial that they turn to make IV go up and down.
Yes, Eliot you are right that IV is a number that comes out of a model but you may be missing the point.
When you are buying and selling options you are buying and selling volatility. The $ amount is virtually irrelevant. I believe OTC they still quote b/a in terms of IV.
Market makers have to be defensive - they need to defend their book. The general idea being to make their money on the b/a spread through volume. As more speculation and hedging occurs during the build up to an earnings announcement the IV will get bid up - demand to buy that volatility. It would be folly for a market maker to make a less defensive market without undue risk exposure to themselves.
Can the market makers manipulate IV (through controlling the b/a)? It's possible...but that would mean they need to know in advance just like you what is going to happen after earnings.
The IV crush is often met with a large move in the underlying that is greater than was implied.
So yes, the market makers might have been laughing at the near 0% move of GOOG after earnings but they may well have been crying after YHOO!
2 cents.
MoMoney.
