It took me a minute to fully get this, so I'm adding this so it's a bit more obvious for anyone else: the piece of paper is much larger than the picture/book so that it can hide the book's relative position underneath it.
if you can tell where the book is, it's not zero-knowledge anymore...
see my other comments -- the idea is that in each round you should be able to verify the construction (there's a Waldo-sized hole and the correct book and page when the pieces are separated) or the proposed solution (Waldo through the hole) but never the offset of the book and hole (because then you can deduce where Waldo is).
a cheating prover (utilizing your strategy, or just Waldo from a different book or whatever) would try to guess which one you will want but only has probability 1/2 of succeeding. through iteration the verifier can be exponentially increasingly confident that the prover knows where Waldo is.