Soulforge: good report.
From your readings, it appears that the main key switch has a "b" contact that is stuck closed or shorted.
The main switch has two contacts - the "a" contact (red & red/white) is closed when the key is ON; this is an "a" pallet switch configuration. By your readings it appears to be operating correctly.
The second contact is a "b" contact - closed when switch OFF ( black & black/red ). By your reported readings it is not changing position, thus the coil cannot produce a spark because the points cannot open the circuit to interrupt current flow.
You also report that the points are operating cleanly, i.e., closing & opening and showing no unexpected circuit resistances. This is good.
What I would do next is to start with key switch OFF, Kill Switch to RUN:
Isolate the coil (+) from the motorcycle's circuit by lifting the (+) lead.
Reconnect the distributor blade wire.
Roll the engine over until the points are full open.
Read continuity from coil (+) terminal to ground - it should be near infinity ohms.
IF NOT - unplug the key switch or disconnect the red/black & black pair. This removes the Main Switch "b" pallet switch from the circuit.
Recheck the readings, continuity should be near infinity ohms.
(IF STILL NOT - lift the other coil lead running to the points and verify the coil isn't shorted internally. This is low probability but possible.)
With coil reading "open" to ground with points open, roll engine to where points close. Verify continuity to ground through coil (+) terminal.
At this point the circuit is capable of making a spark if battery (+) is applied to the coil (+) terminal.
Run a 5A fused jumper from battery (+) to the coil (+). Kick over and observe (NEW) spark plug for spark. When spark seen, disconnect jumper.
As far as ignition timing, the points are supposed to just crack open when the engine is on the compression stroke, 0.8 mm Before Top Dead Center (BTDC). If they crack open at 0.4 mm BTDC it will still start just fine. The point backing plate is used to adjust ignition timing, moving it within the slots allotted. I use the disconnected distributor blade connector to read point opening, my VOM has a "buzzer" continuity setting that's useful.
Point maximum gap opening is unrelated to this timing. They need to open enough to "break" cleanly. Mine routinely run at about 0.5 mm.
Also - wiring is a bit variable from the factory. You also don't know what the Previous Owner (PO) has done. Using the best wiring diagrams you find and CONFIRMING by logical testing what you actually have is the best method. Don't forget to document what you find.
Run these tests & let me know what you find. - ACR -
1. Key switch: Has 4 wires / 2 wires(Black, Black&Red) are connected both when key is ON and OFF / the other 2 wires(Res, Red&white) only connect when ON.
2. Distributor: I have disconnected the blade connector and confirm that the back plate(or frame) and disconnected blade connector to the distributor side connects only when point is closed
3. Coil: I have removed wire to coil (+) leaving the wire to coil (-) connected. I have also disconnected the blade connector to the distributor and check the disconnected blade connector to the main harness side.
1) the blade connector shows continuity to frame for both Key ON and OFF when kill switch is ON. And is discontinued for both Key ON and OFF and kill switch is OFF.
--> You mentioned that it should not show continuity when Key ON. Hence, I am trying to find out why this happens.
Also, concerning the distributor cam, am I correct in understanding that at TDC the point should be open 0.4mm? If I remember correctly it should be closed and open at 0.8mm before TDC.