player="C:\Program Files\VideoLAN\VLC\vlc.exe" --file-caching=5000

It specifies the location of vlc.exe so Livestreamer can launch it.

Now scroll to the end of file and enable these two options with following values :

hls-segment-threads=10 hds-segment-threads=10

These two lines will do the trick for us in order to be able to watch stream without stutter. The reason is that in HLS (Twitch Streaming Protocol) and HDS, unlike other streaming protocols which stream is sent in one continuous stream, it is sliced and chunked in several pieces and sent over HTTP protocol. So it is possible to download these chunks simultaneously with multiple connections exactly like how download managers work.

Save the config file and our setup is complete. We can use it now to watch Twitch stream in source quality in VLC by following command :

Livestreamer.exe LINK_TO_TWITCH_STREAM best

For example :

Livestreamer.exe http://www.twitch.tv/sing_sing best

It takes about 15 seconds for Livestreamer to establish connections and launch VLC.