How to drill through hardened steel??

Sharpen a carbide tipped masonry bit like you would a normal drill. Drill fairly slow.... I've drilled 6"+ thick hardened tool steel with a masonry bit and an air gun for cooling, many many times. Carbide doesn't like the shock of cooling intermittently with water, so unless you can keep it flooded, just use air.
FYI A 1/4" masonry bit is larger than .250". Just grind the sides of the carbide until you hit you desired diameter on a bench grinder. Easier done with a green wheel but can be done with a standard wheel.

Edit. Sorry, just noticed you wanted a 1/8" hole, but the same info still applies.