I think the reason that your pistons are overextending into the barrels is that you have the wrong crankshaft. Check out Harry Fenton's excellent web site on Continentals.
http://www.bowersflybaby.com/tech/fenton.htm He explains all the ins and outs of modifying Continentals. At our field we had a Continental with a mix of parts, C-85, C-90, O-200 and that baby made around 130hp! Never saw a Luscombe perform so well ! Wayne and Kathy Tokarz Corsair Enterprises Ltd. Cold Lake, Alberta, 780-812-8163 780-639-3023