In this work, a first prototype smart optical rotary sensor is demonstrated for fly-by-wire applications to detect cockpit inceptors or flight control surface movement. A rotary encoder, optical setup, electronic circuits, and a microcontroller, with built-in analog-to-digital converters, are packed into a single housing with dimensions of 80 mm × 80 mm × 50 mm to propose a smart sensor. To simulate cockpit inceptors or flight control surface displacement, an actuator is rotated by a computer-controlled driver and the output voltages are sent to the computer using a universal serial bus. Signal processing is done in two steps: software filtering followed by optical powers extraction from the measured digitized voltages. Experimental results show that the sensor has the sensitivity of 17.5 mW · W^-1/° and an accuracy of 0.5% over the full range of 180°. Moreover, we test the sensor's reliability by examining the sensor response while varying the input power of the light source and we demonstrate that the sensor is highly reliable, a vital requirement for avionic applications. The sensor not only meets the requirements for avionic applications but it is also smart which leads to less maintenance, less electromagnetic interference (EMI) (instead of ~100 twisted wire pairs, four buses are used which are more EMI resistant), and significant weight reduction.