Recording webcam

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I am having some problems getting what I want from the "open capture device" feature. I want to record my webcam to a very small size video file so that I can create long security videos without filling up my HDD. I've been playing with the "play," "convert," and "stream" options but I am not sure which one I want. I think it must be stream or convert, and I want the mp4 or webm format for small file size. However, when I test with just a 10 second video, VLC saves the file with the name I gave it AND another avi file with a system time stamp. Below I have used the stream feature with the H.264+MP3 codec to record 10sec with the display locally feature enable. As I record, it only shows the first static capture frame in VLC window rather streaming the webcam video as I think it is supposed to. I have chosen to name the ZProbotector file which comes out as a nice 330kb. However, this other file is 112Mb and is ruining what I want to do.

What are the optimal settings to write my webcam to a space-efficient file suitable for long, uninterrupted video?