1)Booking Day-by-Day--You call and book at the 7 month window as each day of your reservation comes up. In other words, let's say you are booked for the 10th through the 16th. You'll call on the 11th (at seven months out) and book for the night of the 10th at your desired resort. Then you'll call on the 12th for the night of the 11th and so on. It will actually be 6 different reservations if you do it this way. Some members book this way if they are trying to get into small, popular resorts at a busy time.
2)What happens if you don't get one of your days in the middle?--That is the catch to booking day-by-day. If you don't get one of the days in the middle, then you run the risk of having to switch resorts for that night (or nights) and switch back for the remaining nights.
3)Needing extra points?--If the resort you are switching to at 7 months out requires the same number of points per night it's an even trade... no borrowing (or using available points) is needed. If the new reservation requires more points, then you only need to borrow the difference in the two reservations. For example, if your first reservation cost 150 points and your new one will cost 160 points, you only need to come up with 10 extra points.
4)Booking--You DO NOT have to book day-by-day. You can book your stay for the entire length of the stay. If the resort is not available for you for the entire length of stay (and you don't want to risk switching resorts) you can waitlist for the entire length of stay. And you can waitlist for more than one resort at the same time. Some folks find out that some of their nights are available while some are not...and that's where the day-by-day booking sometimes comes in. Let's say (using the example above) that the 10th, 11th, 13th, 14th were available but the 12th and 15th were not. Some will book those 4 available nights and waitlist for the other two. HOWEVER, if those other two nights don't open up, you will have to switch resorts two different times.
And yes, this can all get confusing....until you've done it a few times. Then it becomes fun...in a weird way.
The wait-list is a nice thing. Most folks have good luck with it.