Maybe some clarification will help.
Set the point gap at index, which is where the points are widest open at the center of the lobe of the timing cam. Accuracy here is important.
If the points do not open wide enough then you will have arcing at speed and the engine will four stroke and misfire.
If the points open too wide then they may not be closed enough to give good saturation in the exciter coil at speed and you get a feeble spark and misfiring as well as a lot of plug fouling.
With the points set either too wide or too narrow, you may have problems setting the spark initiation point (timing).
After gapping the points correctly you want to set the timing, at the indicated alignment of timing marks the points should be just starting to separate. Adjustment of this is usually performed by loosing the stator hold down screws and rotate the stator plate forward or backward until you find the sweet spot. Double check after locking it down by rotating the flywheel a couple of times and check.
If the initiation is not attainable you may need to lengthen the stator hold down screws slots a little. If the slots need a lot of lengthening then you would likely need to replace the points because the cam follower has worn out too much (or it is a shytty cheapo set of points).
The other method of getting the magic spot is to run without a key in the keyway, which can be sketchy if the taper for the flywheel to crank is not bone dry clean or has turned and has galled, it may slip while running. The key is only for alignment purposes, the actual grip is in the taper fit.
The other trouble with lengthening the slots too much or running without a key is that the points maybe opening when the magnets on the flywheel are not properly centered on the exciter coils poles, which will deliver a weakened spark.