Caballero would have been a free agent from June 30 but Frank Lampard has moved swiftly to secure his signature for a fourth season.
The 38-year-old Argentina goalkeeper joined the West Londoners on a free transfer from Manchester City in the summer of 2017, and he has won the FA Cup and Europa League during his time at the club.
The former Malaga goalkeeper made nine appearances in all competitions, including four in the Premier League before the 2019/2020 season was curtailed due to the coronavirus pandemic.
Speaking to the club's official website, Caballero said: "I am very happy to make this announcement. It is a privilege to be part of this Chelsea squad and the Chelsea family, at one of the most historic clubs in the Premier League.
"It is a difficult time for everyone right now so I feel blessed by this opportunity and truly appreciate it. I want to thank my team-mates for helping me to be my best and I want to thank the boss and the club for extending my contract.
"I'm sure they will continue to demand the maximum from me and I will compete with the same energy as always. I am very happy."
Chelsea manager Frank Lampard added: "I trust in Willy, he trains brilliantly and is a great professional.
"He stepped into the team earlier this year and showed his quality, and his experience is invaluable in the dressing room. I'm delighted he will be with us next season."
