You put it between your upper legs, as high as feels comfortable (i.e. in a position where you can hold onto it with keeping your legs together). It's usually asymmetrical in shape, the bigger half should be on your belly side. One can get similar results with a foam plank if you want to try it out, but those are much harder to keep between your upper legs.
I swam last night and shared a lane. The other guy suggested keeping my head down. It felt weird but also felt like I had less resistance. I'll have to try the bouy, because I think I'm keeping my head and chest up. When I get everything right, it feels really good. It might only be one or two strokes every other lap, but I can feel it.
It's fluid dynamics at work. Swimming is really about reducing resistance, and there's no better way to do that than to make yourself flatter and longer. Try to extend your arms higher up than you're used to - your lower back should feel like you're getting something from the top shelf. Tight swimwear also helps; one trainer said something along the lines of "you wouldn't go running with a parachute, so why go swimming with baggy pants?". I also prefer to swim with a nose clamp too, but that's a personal preference.