This is not the best option since its not a self-contained unit. You would need to find a way to locate the stationary part a fixed distance from the optical wheel, at all times. I cant think of a way.
A better option might be the Avago HEDR542X series.
But you would still need to prevent the outer part from turning while still allowing it to move with the stick. Not an easy task.
Andy
Andy,
not sure what you mean by a self contained unit?
it seems like a self contained unit to me
it seems almost mechanically identical to the Avago HEDR542X, what's the difference?
I'm probably missing something really obvious
you just slide the E4P over the shaft
you do need to have a non-spinning part to attach it to
one thing I like about the E4P is that is available in different resoultions, so for example you could get either a 180 or a 360 both of which are divisable by 8 and 12 so you can get an exact match to rotary games that have 8 or 12 positions
the vago HEDR542X is only available with a 200 resolution, only evenly divisable by 8, not by 12 although thats a pretty minor thing
so I'm doing what has already been done with other rotary sticks by using a fixed pin and a collar to go around it, it's used in both happs (mechanical and optical) and the SNK, like this Ikari stick:

U360 with us-digial encoder and fix position pin

I've already got the rotary part working (played both Ikari, and 50 calibre last night without a hitch, even worked as spinner in tron and passable in tempest (I did have to adjust the sensitivity for each game in Mame)
but I'm still working on incorporating the top fire
as I said I got that to work earlier but had to do by preventing the shaft from spinning so that obviously that won't work here, but I'm workin' on it
thanks for the input,
Bender