An optical feedback laser diode (OFLD) operating in period-one oscillation (POO) with a moving external target is investigated by exploring its potential sensing capability. First, the modeling of an OFLD-POO sensing system is presented. An analytical expression is derived for OFLD-POO sensing signal, from which a new displacement measurement method is developed. The proposed sensing model is verified by the well-known Lang-Kobayashi equations used to describe the dynamic behavior of a laser with optical feedback. Then, an experimental OFLD-POO system is built in order to demonstrate an application example for displacement sensing. The measurement results show that the OFLD-POO sensing system can achieve displacement measurement with large measurement range, high sensitivity, and resolution.