I'm fairly certain I understand the rule well enough to answer this myself, but just to get an outside opinion on it let me paint a picture of the dilemma.
My home course has a 220 yard Par 3, stream that runs about 50 yards short of the green and then up the left side. The left side is heavily sloped towards the stream, any miss left will end up in the stream. Question is, if a ball lands in the hazard what are your options?
The only two options I see here are playing out of the hazard, which is nearly impossible on this hole, or reteeing and playing your third from the tee box. The hazard extends 10 yards to the left of the stream followed by a boundry fence.
I was playing with a member of the course earlier that claims he could drop within 2 club lenghts of where his ball went into the hazard, which typically you can do with a lateral water hazard, except that no matter where he drops it's closer to the hole. He claims if he took a step back between where his ball is in the hazard and the pin (towards the tee box) it was a legal drop. Maybe I'm over thinking this and have been costing myself strokes for a while but I feel any drop is closer to the hole.
Thanks in advance