The reason you’re not finding that option is that the plug-in IS NOT designed to work that way.
The typical solution for this problem – typically utilizing jQuery/Javascript – will replace or remove bad images visually, after a load error registers but before the usual broken image is display to the visitor. In effect, it conceals or replaces the broken image. The underlying errors remain, along with their negative impact on SEO and page-loads, while filling up site error logs (often along with additional sets of bad image link errors).
The only way (that I know of!) to replace all 404 images ahead of time would be to scan the posts database for image links, attempt to load each one, and remove/replace it in the site database. I’ve run across tools that promised to scan for bad links/images, or seemed to, but I never found one that worked, and, even if it did, it would tend to make repairing or restoring those same images/links more difficult if not impossible. Nor would it address the other main problem that this plug-in is actually intended to address: The presence of working links to unlicensed images.
If your site has a significant problem with 404 broken images, this plug-in can help you to isolate and quarantine, then fix, the posts that produce it. It won’t fully automate that process.