Place oysters, oyster liquid, and water in a large Dutch oven. Bring to a boil. Remove from heat; let stand 5 minutes or until edges of oysters curl. Drain oysters in a colander, reserving 1 cup liquid.
Layer half of oysters, onion rings, red pepper strips, peppercorns, and bay leaves in a pint jar. Repeat procedure in a second pint jar with remaining ingredients.
Combine reserved oyster liquid, vinegar, salt, and hot sauce. Pour evenly into jars. Cover with metal lids, and screw bands tight. Refrigerate at least 6 days.