Rumors in the market may be contributing to the situation, Darst pointed out.
"Earlier in the session on Friday, ... Singapore's Temasek came out and made a statement that there had been some rumors that they might be pulling their money out of Merrill Lynch. They called that 'mischievous speculation' or 'speculative mischief' -- as if there's any other kind -- and so, rather than implied volatility coming down, it went up, so keep an eye, in particular, on the August 25 puts, which were the most actively traded options on Merrill Lynch on Friday. The price tag on those on Friday, heading into the close, was $2.13, reflecting about a one-in-three chance of Merrill breaking below 25 by mid-August."
Options also were active on Amgen , Darst said. Most traders were positioning for the company's earnings report Monday. But the company Friday reported late-stage clinical trial results that showed denosumab reduced the incidence of fractured vertebrae in post-menopausal women.
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"Something else to keep an eye on with Amgen was that we did notice some defensive positioning in the October contracts, so a lot of interest not just in these front-month options that are connected with the earnings, but also open interest in the 50 strike puts in October in Amgen doubled over the period of last week, which could indicate some traders looking to take protective positions, and looking to defend against stocks handing back those gains by the fall."
Medical instrument companies were also active, she said.
"Throughout the day Friday, we saw high implied volatility and high volume in medical instrument makers. This sector as a whole took a hit on Friday, because there were a couple of names out with bad earnings and even poorer guidance, which has been really toxic for stocks lately. Cepheid
and Affymetrix disappointed the Street with their earnings, and what we saw was the entire sector take a hit. Abaxis , also a medical-instrument maker, also had some disappointing earnings. What we saw here was, after earnings, implied volatility will recede very quickly, but in the case of Abaxis, it's remained high. It's crazy. So, implied volatility is up about 63 percent against a historic reading on the stock of just under 47 percent. That's an indication that the option market sees potential for even more turbulent price action in this stock over the next month than it's shown historically, and the way we saw option traders playing this was through trading November 20 strike calls."
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