The characteristics of traditional direct and oblique laser displacement sensor were analyzed. Combined with their advantages, a compact laser displacement sensor based on auto-collimation principle was designed. In the structure, the linear structure was used to replace the optical path layout of the large triangle, and the auto-collimation optical path structure was formed. A beam splitter with a splitting ratio of 50% was introduced and placed at an angle of 45° with the optical axis to combine the focusing lens and imaging lens into one, and made the condenser, beam splitter and photo-detector coaxial, which simplified the system structure and reduced the volume of the instrument. At the same time, the Scheimpflug condition conforming to the auto-collimation principle was derived. The optical design software Zemax was used to simulate the optical system. The system adopts the structure of single lens, the front surface is Forbes aspheric surface, the entrance pupil diameter D is 4 mm, the field angle 2 ω is 4°, the total length L is 20 mm, and the imaging quality and system size are the best. The system has the characteristics of large measurement range, high resolution, small structure size and small light energy loss. Compared with the experiments of Keyence laser displacement sensor, the system can ensure the technical indexes of probe resolution 1 μm and comprehensive detection accuracy ±2 μm.