just to finish our conversation though........
You said the engine was smoking. Was that from tranny fluid ? If it was leaking from the stator side it would be a lean condition and do just the opposite and not smoke at all and would run at erratic idle speeds.
Then you said you replaced the seals and did a leak down and found no leaks. That would be next to impossible since during a leak down you inject air into the cylinder and depending on how much pressure you injected, some it bound to escape. So a ZERO leak down on a used motor (even a fresh engine) is hard to fathom.
Typically a new piston install would include .0035" - .0045" of piston to wall clearance. So yes, some rocking of the piston is OK and should be expected. A finger nail thickness is more like .040" and thats really wore out. That much of clearance would also show on the cylinder wall and most likely have next to no compression.
Rotate the piston down and inspect the cylinder. Do you see scratches or deep grooves ? With that much clearance I would expect to see damage or some sort.
If the motor ran fine and had reasonable compression and wasnt making "slapping" noises, Id figure out my jetting and run it.
Some things that you have described dont add up to me. Best bet is to take it to someone to look at that has experience with engine machining. Let them determine if the the bore is worn or damaged and needs fixed.