Bought a hole saw. 5/8" was the best choice but not deep enough so I went with a 3/4". Remove the pilot drill. Just take it easy and there is no way you will damage the thread. Once I reached (by some simple calculation) the depth prior to cutting through the base of the lug nut I found that the wheel would start to move and break the last few thou of alloy. This left a small ring of alloy that had to prized out with a pick before the wheel would come off. Success!!!
As an extra bonus pictures of the 17mm spacers that are fitted to CS wheels.
Thanks for all the help
A couple wraps of tape around the exposed lug threads might be enough to protect them from the spinning blade. For those playing along at home, this job is a little like Russian Roulette. You get to work with a hole saw that cuts the aluminum wheel even more easily than it cuts the aluminum lug nut. You can do a few things to improve your odds though.

The hole saw originally has a centering drill bit in the holder, but that has to come out so the saw will go over the lug. Find a bolt or other round stock to fit in where the drill was, fitted so it acts as a 'drill stop' on the end of the lug. Calibrate the length in one of the adjacent holes, so it stops just short of cutting the rim metal.

Put two lug nuts back in so the wheel is held firmly in place as you drill.

The hose saw has teeth 'set' both inwards and outwards. Depending on how good the saw blade is, work carefully to move the inward-set teeth out enough to be even with the sleeve section of the saw, plus a few thousands if possible. This will keep those saw teeth from chewing on the stud threads. The tape wraps take up the rest of the clearance and help keep the saw body aligned with the stud as you drill.

GO SLOW with the drill motor. Fast enough so it does the work but slow enough that the teeth actually cut the lug nut metal. Spinning just wears the teeth faster and adds more heat.

When you get close to the final depth of your cut, reverse the motor and go slow with the drill motor and some extra pressure. There's always a chance that the heat of the saw cutting has broken the bond between the lugnut face and the wheel. In the normal cutting direction, you are tightening the nut into the wheel. Reverse just might back it out.

Use plenty of lubricant as you drill with the saw. PLENTY. Wally's ATF-and-Acetone penetrator would be OK for this duty, but you have to keep it flooded with the stuff to be effective as you drill. Careful as it is flammable though.
Dr. Bob.
'89 S4 Auto, black


one other option:

Emergency Wheel Nut Remover Set

A set of 4 Piece Locking Wheel nut / Bolt Remover in a Metal Case.

SIZES 17 / 18.5 / 21.5 / 26 X 38mm LONG
Designed to remove the locking wheel nut when the unlocking key is missing or broken.
Manufactured from molybdenum steel, hardened, tempered and chemically blacked for corrosion protection

1/2 Drive wrench REQUIRED

Thin Side walls to reach between nut and wheel
Designed to minimize the risk of damage to the wheel.