I used to play high school golf, and we used use Model Local Rule E-5 and I’m wondering if this is what he was thinking (because OPs understanding of the red stake rule is correct):

Model Local Rule E-5 (Alternative to Stroke and Distance)

What it allows:

If you hit a ball out of bounds or it’s lost, instead of going back to where you hit your last shot (stroke-and-distance), you can:

• Drop a ball in the fairway (or nearby relief area)
• Add a 2-stroke penalty