Speculation had recently suggested that Woodson may only have one year left in New York if the team were to perform poorly during the new season.
However, the Knicks have decided to ensure that the 55-year-old will remain with the franchise until the end of the 2014-15 campaign.
"I have long respected Mike and think he has done a remarkable job since becoming the head coach of the Knicks," team president and general manager Steve Mills said in a statement.
"After spending time with him recently, it is clear that picking up his option is an easy decision."
Woodson was named head coach of the Knicks in May 2012.