The club’s 2016/17 young player of the season will remain at Huish Park until the summer of 2019.
The 21-year-old joined the Glovers at beginning of last season and ended the campaign as the club’s leading assist maker (five).
A pivotal part of Darren Way’s attack, Khan featured 38 times in his debut year in Somerset, producing a goal or assist every two matches on average.
The former Barnsley man netted on eight occasions – second to Francois Zoko who also signed a fresh deal last week.
“Otis was a fantastic attacking player for us last season,” Way said after retaining the attacker’s services.
“He has gained a lot of experience playing in his first full season of league football.
“He attracted interest from other clubs so I’m pleased the board has supported me in securing his services.
“We thank Otis for sharing his commitment to the club until at least 2019.”