The solution from Aditya Patil is a good start, but the resulting excluded area is a square, rather than a circle.
You need to do the same thing, but apply it to the X,Y meshgrid values, rather than the x,y ranges.
Try this:
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U0=1; %Uniform flow velocity
r0=1; %radius of the imaginary sphere
k=0.5*U0*r0^3; %strength of the dipole
c=k*4*pi;
x = -2.05:.1:2.05;
y = -2.05:.1:2.05;
[X,Y] = meshgrid(x,y);
t=atan2(Y,X);
r=sqrt(X.^2+Y.^2);
%Stream function
psi = 0.5*U0*Y.^2.*(1-r0^3./(X.^2+Y.^2).^1.5);
%Velocity potential
phi = U0*X.*(1+0.5*r0^3./((X.^2+Y.^2).^1.5));
% Velocity in polar coordinates
vr = U0.*cos(t).*(1-r0^3./(r.^3));
vt = -U0.*sin(t).*(1+.5*r0^3./(r.^3));
% Velocity in cartesian coordinates
vx = U0 + c./(4*pi*(X.^2 + Y.^2).^(3/2)) - 3*c*X.^2./(4*pi*(X.^2 + Y.^2).^(5/2));
vy = -(3*c*X.*Y)./(4*pi*(X.^2 + Y.^2).^(5/2));
%Pressure coefficient on the sphere surface
theta=0:pi/100:2*pi;
Cp=1-9/4.*sin(theta).^2;
%Plots streamlines
% ---------- Start exclude points within RADIUS -----------
% Save copies of original grid matrices.
% Excluded points are needed for velocity vectors.
X0 = X;
Y0 = Y;
% Exclude plot points inside circle of R = RADIUS
% NOTE: Inserted after calculations, since the excluded points affect
RADIUS = 1;
flag = [abs(sqrt(X.^2 + Y.^2)) < RADIUS];
X(flag) = nan;
Y(flag) = nan;
% Add circle to mark the boundary of excluded points.
viscircles([0 0], RADIUS, 'Color','k', 'LineWidth', 1, 'LineStyle','--');
hold on;
% ---------- Finish exclude points within RADIUS -----------
contour(X,Y,psi,20,'k')
xlabel('x'); ylabel('y')
hold on
grid on
line(xlim, [0,0], 'Color', 'r', 'LineWidth', 1); % Draws a line for X axis
line([0,0], ylim,'Color', 'r', 'LineWidth', 1); % Draws a line for Y axis
axis equal
title("Potential flow around a sphere")
%Plots equipotential lines
contour(X,Y,phi,400,'k')
%Plots velocities
factor=.001;
% NOTE: Using original points for velocity vectors,
% since interesting velocities are in excluded area.
quiver(X0,Y0,vx*factor,vy*factor,'g','AutoScale','off');
filling(r0,'w');
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