2001 Oldsmobile Alero pistons

Something doesn't add up. Water was poured in the oil cap, then it was drained out? That should be the end of the story. How did it get into the cylinders? If the engine wasn't started with that water in it, there would be no water in the oil passages to cause any damage. Even if it was started like that, how long was it run?

Why was water being added to begin with? What was the original problem or symptom?

That's correct about water not being able to be compressed, but that isn't a concern when it's in the bottom of the engine where the oil is. The liquid has to get into the cylinders to cause "hydro-lock". I suppose it could have gotten forced past the piston rings, but that would have occurred slowly enough that it would have gotten pumped out through the exhaust system. Even if the engine did lock up, it's not the pistons that would be bent. It's the connecting rods they're attached to, and if the engine didn't start, even that is doubtful. The starter motor isn't strong enough to bend connecting rods. Water has to pour into the cylinders while the engine is running for that to happen.

The knocking noise is most likely due simply to the water in the oil. Oil "isolates moving parts from each other", in other words, it lubricates parts. Water doesn't do that so the bearings get torn up. The excessive clearance allows those parts to bang against each other so much that you can hear it.

Bearing failure is serious and is cause to look for a good used engine from a salvage yard, but you have to consider the original overheating problem too. A common cause of that is a leaking cylinder head gasket, and that is also a fairly expensive repair. At the mileage you listed, you already got most of the life out of the engine before some repairs could be expected to be needed.

Before you write the engine off completely, keep working to get the water out, then try to get it started again. Running poorly can also cause knocking sounds that will go away, but until it does, it can sound like engine bearing failure. If the engine runs reasonably well, drain the oil again to get as much of the water out as possible that has made its way into the passages.

Water in the cylinders will dry out if you leave the spark plugs out for a few days, but water in the oil will be trapped in the passages. The only way to get it out of there is to drain and replace the oil two or three times, with running the engine in between to circulate the oil and water out of the passages. Once it's running okay, you'll need to risk driving it at highway speed for a while to really warm it up so any remaining water will evaporate and get drawn out. This is risky because if a lot of water is still in the oil, it could damage the bearings, if they aren't already.

The oil residue will prevent parts from rusting. If the oil drain plug was left out, some water will have evaporated, but whatever is sitting in the passages will stay there. It's doubtful sitting for three months added to any problems. Any damage that has occurred has done so already. Eventually that water will cause parts to rust, and that can cause problems if those parts have precisely-machined mating surfaces. Three months shouldn't be long enough for a lot of rust to form, but the longer you wait, the more damage is likely to occur.