Well, any market maker that traded with The Call Bomber in the early 2000s would beg to disagree. If you are a BSD and pull a lot of clout with the sales force, you can frequently wrestle options liquidity out of the sell side firms that should not be there given the liquidity of the underlying.
Who is the call bomber? My view on option liquidity was the avg daily volume in the non leaps. Open interest overstates where there is static structured product hedges and with respect to stock volume, there are surprisingly liquid stocks with low option volumes. Not tier 1 stocks but in the tier 2 category. Atticus is right to look at notionals.
There was a guy at one of the funds that would come in and ask a few firms for slight upside calls in a specific semi-liquid stock, in size. The trick was that he would hit all of the firms he quoted - the illiquidity of the underlyng and the option made the trade a self-fulfilling prophecy.
He would have to lift them so that he gets a vol bump plus some free gamma pnl. I heard of a very large market maker running the same strategy in GOOG shortly after it IPO'd. Same firm was doing it in QQQ's back when it was QQQ instead of QQQQ.
i read a bit about liquidity holes in "dynamic hedging" i found it extremely interesting.. if you can find a hole exploit it haha google taleb liquidity and liquidity holes