Optical sensing methods are especially attractive due to their low cost, rapid detection, and high sensitivity. Due to multiple enzyme‐mimetic activities, fast electron transfer capability, and biological molecules affinity, cerium oxide nanoparticle (CNP) represents a promising candidate to be used as the recognition and/or transducer element in optical biosensors. Despite the significant achievements of CNPs as therapeutic agents, the applications of CNPs as sensing elements are still in their infancy. To deepen the understanding and promote the development of CNP‐based optical biosensing, in this review, the ingenious design and fabrication of CNP‐based optical sensors are introduced, and the underlying sensing mechanisms are in‐depth analyzed. Furthermore, recent advances in CNP‐based optical sensing strategies for biomarker detection, disease diagnosis, and therapy are intensively discussed. Finally, current challenges and potential solutions of CNP‐based optical sensors for effective in vivo sensing are outlined.