Go to 'Products > Option Groups' and click the 'new' link.

Give the option a name, such as 'Colour', choose the display type. You will also have to set language specific names for this option for use on the front of the site. Click 'save'.

Next, click on the 'Option Values' link for the option group you just created.

Enter the name, e.g. 'Blue'. You can also enter a price and weight modifier for this option to reflect the fact that some options come at additional cost. Note that these values are just defaults – you can change them per product when you use the option later if you wish.

Add as many options as you need.

Main options page
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