I think you hit the nail on the head. The "dressed in red" part I've always thought of as him saying how he was betrayed by the rest of the band, you know like when you dress someone in red for a sacrifice. It's probably the best song on Saucerful, just because you can tell that Syd knew what was going on, and in his usual cryptic way he expressed his feelings. Watching the video makes the song way creepier.