Regardless of whether the hazard has red or yellow stakes a player ALWAYS has at least two options - re teeing and this option:
Drop a ball behind the water hazard, keeping the point at which the original ball last crossed the margin of the water hazard directly between the hole and the spot on which the ball is dropped, with no limit to how far behind the water hazard the ball may be dropped;
Depending on the design of the hole this option may not be significantly different (or could even be worse) than re teeing.
The other option with red stakes is this one:
As additional options available only if the ball last crossed the margin of a lateral water hazard, drop a ball outside the water hazard within two club-lengths of and not nearer the hole than (i) the point where the original ball last crossed the margin of the water hazard or (ii) a point on the opposite margin of the water hazard equidistant from the hole.
Depending on where his ball last crossed the margin of the hazard, this option may not be possible. For example, if in the situation you described it would take more than two club-lengths to get to a point on the course than was outside the hazard AND not closer to the hole, then this option may not work.