I just looked at the photo - the knob is for placing where the top hole and bottom holes are punched. Use some scrap paper first to make sure they are even and then tighten the knob in the right spot and don't move it. Kinda like a three hole punch.
You can use any size combs. I have no idea about the knob, but we use ours for anything from 1/4 inch to 3 inches. The length of the comb never changes - the size is around not length. So if you need to bind something that uses one ream of paper you need a 2" comb.