ok, four things...
First, since the Windows based software you want to run virtually is video related, most likely power intensive, I'd recommend Parallels 7 over VMWare, as it has better performance according to benchmarks.
Secondly, yes: you have to install Parallels as any app on your boot drive, along the Virtual Machine containing windows and the video app in your user folder, as it does by default. Then, once installed and working ok, you copy the Virtual Machine file from your Documents folder, to the external drive (the external USB must be mac-formatted for better results). Open the VM on the external drive using Parallels. Once you're sure it works, you can delete the VM on your boot SSD drive (thus, reclaiming the space lost by the Windows install), and use the one on the external USB. The Parallels app must remain on your app folder, as any app.
Third... have you thought about installing a second hard drive in your MBP? since your SSD is so small (for today's average needs anyway), I'm guessing you'll be struggling over space very often. A second drive - replacing your optical drive, and keeping the optical drive in an external USB enclosure - will let you use the SSD as a boot drive, keeping the speed of your apps... and a high-capacity high-speed rotational drive with your user files will give you the space you need, at much greater speed than any USB external. Check
this out for more info. It's worth the investment (and btw, I don't work for OWC).
And finally, if you don’t want the data doubler solution (by far the most efficient) I'd recommend to think about investing on a
Firewire / eSATA external drive (you'll need a
dedicated expresscard for eSATA, which your 17" is equipped to handle). USB 2.0 is way too slow. Internal>external eSATA>Firewire>USB 2.0. There are portable, bus powered Firewire and eSata enclosures that will do much better. They are a bit more expensive than USB, but much much faster as work drives. There are some USB 3.0
enclosures and
expresscards too, but I'm not familiar with them, and since OS X doesn't support USB 3.0 officially yet, they might raise some issues.
Hope that helps.
cheers!