Yes you can. Each product can be tracked or tracked by option. That is on the Inventory tab of the product in question. You will need to create SKUs for each option combination. You then go to Setup & Tools > Inventory and you will see options there.
lol...I haven't even gotten to 'options' yet! The 'quantity' drop down shows 1-30 when only 1 item is available - from everything I 'think' I have seen - that is a fixed number and has nothing to do with actual inventory for that product (or will that change with the live store?)