All you need to do is reduce the minimum contrast by moving the slider to the left. Reducing the minimum contrast allows colors other than black and white to be used for the text. Here's why:
A higher minimum contrast will force the text and background to be farther apart in terms of brightness. So if you have a black background, a higher minimum contrast will force the text to be closer to white. Similarly, if you have a white background, a higher minimum contrast will force the text to be closer to black.
http://superuser.com/questions/353396/how-to-set-color-terminal-for-iterm2