How to create a cutaway effect with iMovie11

1. Make a cutaway

With iMovie's Advanced Tools turned on in the Preferences window, select a shot from one of your Events and drag it over a clip in your chosen project. A contextual menu will appear. Select Cutaway and the clip will be placed above the original, on a second layer.
2. Move and alter

As you drag the cutaway along, a shadow will appear on the clip beneath it to give you an idea of which part will be obstructed. Move the cursor to either one of the cutaway's edges to turn it into a resize tool. You can drag the edges inward or outward to decrease or increase duration.
3. Fades and opacity

Double-click on the cutaway to open the Inspector window. The middle section offers you a couple of options specifically for that type of clip: you can choose to add a cross-fade transition which will appear both at its start and end; or alter the opacity to see part of the lower clip through it.