Cueto, who will be paid $10 million in 2015, finished last season with a 20-9 record and 2.25 ERA, becoming the Reds' first 20-game winner since 1988, when Danny Jackson finished 23-8.
The 28-year-old right-hander also led the National League in games started (34) and innings pitched (243 2/3) and tied for the NL lead in strikeouts with the Washington Nationals' Stephen Strasburg (242).
Last season was a bounce-back season for Cueto, who was limited to just 11 starts in 2013 due to a recurring injury of his latisimus dorsi muscle.
He is 85-57 with a 3.27 ERA in seven major league seasons, all with the Reds.
While the Reds picked up Cueto's option, the team reportedly declined to exercise 2015 options on the contracts of outfielder Ryan Ludwick and infielder Jack Hannahan, buying them out for $4.5 million and $2 million respectively and making both players free agents.