Step 4
Go to Edit > Preferences > General and make sure that the Keyboard Incrementis set at 1px. Select the largest, red circle and make two copies in front (Control-C > Control-F > Control-F). Select the top copy and move it 5px up using the up arrow button from your keyboard. Reselect both copies made in this step, open thePathfinder panel (Window > Pathfinder) and click the Minus Front button.
Make sure that the resulting shape stays selected and focus on the Appearancepanel (Window > Appearance). Set the fill color at black (R=0 G=0 B=0) then simply click on the "Opacity" piece of text to open the Transparency fly-out panel. Focus on the Blending Mode drop-down menu and set it at Soft Light.