Create Compound Shape

Create Compound Shape

First you create two separate circles. Then you turn them into a Compound Path by selecting both and going to Object > Compound Path > Make (or you can hit Cmd/Ctrl + 8). Next, you go to Effects > Path > Offset Path...and enter a value that makes them overlap each other.

Add Effect Again

Add Effect Again

Now choose this effect again, and enter the same number but now with a minus sign in front. Assure you have Round selected as Joins. With Preview checked you should see the result. Click OK. Select only the smaller circle by using the white arrow. Now move the circle around and see the magic happening! 😃