Sweeeeeet Headphones, Bro
What you need:
All you are doing is basically making a knot over and over to cover the cable. If you've ever made friendship bracelets with thread like this before, then you'll pick this up quick.
I can't explain it better than Melissa, so check the tutorial out here: http://www.lookwhatmelissamade.com/2011/12/wrapped-headphones.html
Her blog is awesome, so follow her!!!
+ I'm working on doing this to my IPhone cable too!
Another cool idea is to bead your heaphones. How, you ask? One of my friends used what I can only describe as "holed plastic cylinder beads" (thanks ehow), cut a slit down the side of each bead and popped them onto the headphone cable. Easy, time consuming, totally awesome. Check out my friend's how-to here: http://red-wheelbarrow.blogspot.com/2012/01/listen-to-your-heart.html
color beads image by jonnysek from Fotolia.com