There's a book called The Great Mutiny by Dugan IIRC covering the mutiny at the Nore and Spithead in 1797. According to this book, the mutineers, in order to let other ships (and the Admiralty on share) know that they were serious, hoisted a simple red flag, which at the time was the signal for "Ammunition is being loaded." The use of the red flag as a symbol of mutiny spread to other ships,and was adopted by other organizations, often without knowing its origin.
Sounds reasonable to me. . . Does anybody out there have a better story? (or can find a use of the red flag as a symbol of revolution prior to Spithead 1797?)