The loop option means loop-back. Since there is no real device file in /dev for filesystems which exists only inside in a file, the kernel provides these loopback devices which act as a conduit for the filesystem-in-a-file.
I think it's not usually necessary to specify which one to use - you can usually just say "-o loop". Also, the ro option (readonly) is not necessary as the CD filesystem cannot be written to anyway. Lastly, the filesystem type will probably be determined automatically, so you might not need the -t option either. Hence this should do the same thing as your command with a little less typing:
# mount -o loop cd.iso /mnt/cdrom