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This paper introduces a low cost method of sensing position using a optical sensor. Main objective of this study was to overcome the shortcomings associated with the conventional contact type of position sensors using a low cost device. In a slippery terrain, rotary encoder based data often produce erroneous results, whereas, if optical based method is used it would be preferred. For this study, PAN 3101 type low cost CMOS optical sensor is used. This sensor is often used for making computer mice. Built device comprises of a FAN 3101 sensor, lens assembly, illuminating components and a microcontroller based interface. Lens assembly comprises of the convex lenses. PAN 3101 sensor processes the images that are taken through the lens assembly and gives the position in terms of relative distances traveled in vertical and horizontal directions. Microcontroller based interface handles the communication between PAN 3101 sensor and the main application that utilizes this technology. So this module can be used in applications that needs smooth position detection capabilities. Built device was attached to a mobile robot so that the robot can be driven from the position information of the rotary encoder and the new optical position sensing device. Results from both rotary encoder and optical device are presented to validate the applicability of the proposed concept.