I think it is mostly just making a larger buffer.
However, if the intent is exactly what you say it is. If the market drops 30% I want to buy more, than I'll suggest an alternative approach which will earn you a bit more income.
Write a long term put at 30% below the market. SPY is at 195 so 30% below would be 136. You could sell a SPY 135 all the way out until Jan 2016 for around $250, but the $13,500 into a 18 month CD earn 1-1.5%, plus the 1.9% you get from the option premium. If the market crashes the money is in the bank ready to be used to buy cheap stocks. If the market doesn't crash write another put and buy another 1 year CD.
Even if you are uncomfortable for writing options (plenty of reasons to be), conceptually you should be willing to do this.. Other wise it seems like it is just having a larger cash buffer.
I'm not sure I understand what you're saying.
If you're writing put options, wouldn't you lose a ton more money on a market crash?
That would increase volatility/risk which is the opposite of what we want.
In this example you're agreeing to boldly step up and buy like a boss at 135 (while Warren Buffett cheers you on), which implies that the market dropped over 30% (from 195 to 135). Presumably you'd be able to sell those shares at a profit someday, although they might go quite a bit lower than 135 before they recovered. The way to lose money on the shares would be to buy at 135 and then sell them at a lower price, which would imply panicking or running out of cash before the market recovers.
The "risk" is that you're contracting to buy shares after the market has dropped 30%. Technically volatility is a component of the price of an option, but the strike price of this option is so far out of the money that its trading price wouldn't be very volatile. (And by the time you get exercised, volatility has pretty much smacked every equity investor.) Instead the option has actually reduced volatility by letting the investor put their money in CDs (no volatility there) and boost their return a little (the premium from selling the put) while still owning a chance to participate in the market.
The mechanics of getting exercised are problematic but straightforward. The brokerage that let you sell the option is probably insisting that you have to clear all of your exercised options (if they're exercised) within three trading days. That means they would require you to have a margin account from which to supply the cash for the purchase, and if you tap those funds then you'll pay interest on them. The bank or credit union that holds the CD (which you're planning to use if your put option is exercised) will drag their feet for a week or two before you can get your hands on the cold hard cash (after paying the early-redemption penalty). Then you'd have to EFT or wire the cash to the brokerage account to settle your margin debt (or keep paying the interest). So although you earn some money from selling the put you'd probably pay far more than those earnings by being charged margin interest, redeeming the CD (at a penalty), moving the money to the brokerage (wire fee), and executing the trade (trading fee + commission).
Every investor who's safeguarding "dry powder" should be willing to sell naked puts. It's a powerful way to commit to your decision. Otherwise when the market drops 30% we'd all curl up in a fetal ball around our dry powder and insist that the market was going to drop a lot more and that we don't want to do anything with our cash because we might need it to buy MREs, seed corn, and ammunition.