Arduino as ISP programming the Arduino, not the connected ATmega328P
If your target AVR is an Atmega328P, why are you using "Tools > Boards > Arduino Nano w/ ATmega328" and not "Tools > Boards > Arduino UNO"? If you have the ArduinoISP sketch uploaded and running on the UNO and "Arduino as ISP" selected as the programmer, it should all work.

An Arduino R3 should not need the 10uF capacitor on its RESET pin but it does no harm but remember, if you leave the capacitor in place, you can't upload to the UNO. I suggest that you start with a fresh upload of the ArduinoISP sketch to the UNO, attach the capacitor to prevent the UNO resetting and then just upload the Blink sketch to the target using "Upload using programmer" with "Arduino as ISP" selected. Make sure that the COM port is the COM port for your UNO though!

I know you have done this but it is important to use the "Arduino UNO" board type. Oh, by the way, it's a good idea to put a 10K resistor connected to VCC on the RESET pin of the target AVR.