I start by picking a spot on the board. With the smaller of the two bits you've chosen cut half way through the thickness of the board. You'll see why half way in a second.
Then switch to the larger of the two bits, and do the same again, half way through.
Now put the smaller bit back on and go all the way through. Tap the little circle waffer out of the cutting tip and switch back to the larger bit and cut all the way through.
It will look like this right before the middle though cut is made. The reason for all the flipping bits is so that you make the center of the ring using the drill bit insert into the cutting tip to guide the larger bit in a more even manner around the smaller diameter. Once you have the larger diameter cut half way you can remove the middle pice by cutting all the way with the smaller tip and the larger bit now has the same center in its diameter even though the center is gone. The teeth of the tip will simply stay in the groove.