The 19-year-old goalkeeper has been part of the club since his 2016 move from Bury, and he is now tied to Molineux until at least 2020.
Ruddy joined Oldham Athletic on loan at the start of the season, but has since been recalled to play in Wolves' Under-23s.
"I'm really pleased - I've thoroughly enjoyed my 18 months here and I feel like I'm progressing really well," the teenager told the club's official website.
"The coaches and the staff have really helped me during my time here and I get on with everyone really well so I'm really happy to stay here for another couple of years.
"I had my first loan this season which was probably the best experience of my career. It was great to get some minutes on the pitch in men's football. I think the coaches at Wolves got me ready for that during the 18 months that I've been here."
Ruddy also has an option on his contract to extend the deal by a further year.