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Tubs stated it well. The points gap should be set so that event #1 occurs when the flux in the coil is changing most rapidly. I.e. the point at which the flux polarity changes. The point of rapid change in flux is set by the geometry of the magnets, coil laminations and position of the flywheel (set by the flywheel key). Rapid change in flux results in maximum current in the primary coil, which in turn results in a hot spark when the points open.
Note that the flywheel key sets the relative position of the flywheel magnets, and the points cam. This is what allows a particular points gap to open the points at the proper time for event #1. A timing tool allows for more precise timing, as it eliminates the tolerances of the cam, eccentricity of the crankshaft, and difficulty is setting the gap precisely.
Event #2, as stated by Tubs, is the preferred timing for best combustion, and is set by the position of the magneto plate with reference to the crankshaft and piston.
John Van