The profile accuracy of screw rotors plays a vital role in stabilizing the meshing operation between mated rotors. Such stability can minimize the vibration and noise, as well as improve the sealing performance and wear resistance. This is the main reason why form grinding is extensively applied as a finishing process to maintain high screw rotor profile accuracy. Since the installation parameters for form grinding wheels affect both the grinding wheel profile accuracy and grinding performance, it is essential to obtain reasonable installation parameters to guarantee the high precision and good grinding performance of form grinding wheels. In this paper, a novel optimization design method for form grinding wheels for screw rotors has been proposed. For the first time, the relationship between the grinding wheel installation parameters and profile accuracy is established to evaluate the grinding performance. A parameterized program has been designed based on space engagement theory. The characteristics of the contact line and profile features of form grinding wheels under different installation parameters have been investigated. Then, the proposed method was employed to select the correct range of installation parameters. To validate the proposed method, a set of experiments, including the manufacture and measurement of several screw rotors, was carried out. The results reveal that the precision of the screw profile is significantly improved compared with the empirical method, thus showing the effectiveness of the proposed method.