An apparatus and method are provided for setting the AC and DC bias levels of a laser diode in an optoelectronic transceiver so as to control the device's extinction ratio. An optical output of the transceiver is looped back to an optical input of the transceiver. The method includes setting a DC bias level for the laser diode, setting an AC bias level for the laser diode to each of a predefined sequence of AC bias level settings, and receiving from the transceiver a sequence of optical output power measurements, the sequence of optical output power measurements including an average optical output power measurement corresponding to each of the AC bias level settings in the predefined sequence. From the received sequence of optical output power measurements preferred AC and DC bias level settings are determined and stored in the transceiver so as to control the AC and DC bias levels of the laser diode.