You actually can that easily. You don't have to change any setting actually. But you just need to create a reference movie for each of videos you want to put on the iTunes Library. So instead of adding the actual video files to iTunes Library, we just put the reference movie file, which is very small in size. Then the actual video files can be placed on the external drive.
I'm doing in such a way because I'm using laptop, which impossible to add all of video files to the internal drive.