Notice that the circle is added to the 2D section drawing, and the 3D product is updated automatically with a circle cutout.
If the polyline is not Closed and you don't want to erase it and start over, enter PE (polyline edit) at the command prompt and select the polyline that needs to closed. Click "Close" from the option list and press Enter. The open polyline is converted to a closed polyline and, after that, useable in updating the 3D product.
All of these methods conform to the SMT rule that 'no vector of the polyline may extend outside the borders of the 2D section entity,' in this case a stud. If it does, the cutout will not be recognized or displayed in the 3D product.