Ellis Vener , Mar 10, 2011; 09:43 a.m.
I'd geta 430 EX II instead of the 580 EX II, but to answer your question you'll get the best mix of efficiency and diffusion of light by settign the flash so it's beam pattern nearly fills the umbrella. You should flip dow nthe diffusion panel to make the beam wider or use something like a StoFen cap o nthe flash.
You get the best general lighting effect for portraits by having the edge of the umbrella about as far from the subject as the diameter of the umbrella bowl. Closer than that and the light will wr"wrap around' your subject more (less modeling effect), farther away than that and the contrast between lit and shadow areas will be become greater.
As to where to place the umbrella relative to the subject, that depends on what you think creates the best looking lighting for the subject and the effect you want to create. The closer the light is to the camera the flatter the lighting effect will be, the greater the angle to the subject fro mthe camera's point of view the longer the greater the modeling effect will be.