The "Rule of Cool" is somewhat of an extension of the "yes" rule. The idea here is that as a GM you should never be saying 'no' to the characters in your game. "Yes, and...", "Yes, but...", and "Yes, if..." are ok, but "no" should be avoided whenever possible. The Rule of Cool takes that and encourages you to bend the rules if the thing that is being tried sounds/feels really cool. That said, there is more to it than just "that sounds cool, do it." Today I want to talk about that.
First Caveat: Never to the Detriment of Others
The first thing to keep in mind with the Rule of Cool is that it should never be done to the detriment of others. Does another player have an awesome moment all lined up that they've set up fair and square? If so, it's very uncool to take that moment and give it to someone else. Especially if doing so is only accomplished by bending or breaking a rule. If it's completely legal, well, that happens sometimes. But don't approve something because it sounds awesome if it is going to take that moment from someone else.
Second Caveat: This is for PCs, not NPCs
As the GM you have the power to break, bend, or re-write the rules as you see fit. If you say a monster can move 300 feet in a round leaving a trail of 20d10 damage behind it, then it can do that. The monsters and NPCs have a lot of freedom to be able to exist outside the rules, they don't need the help from the rule of cool. Yeah, it would be epic if the Dragon got to swallow the fighter as it jumped off the tower...I mean, for the dragon. This is kind of an extension of the first caveat, but even if an NPC is on the players' side, don't bend/break the rules in the moment to make them even more cool. It hurts more than it helps, trust me.
Third Caveat: Bend, Not Break
In general, you should be bending rules not breaking them for Rule of Cool moments. Someone is falling as another creature is ascending and they're going to pass each other? Let that player have a chance to grab onto the ascending creature - or attack it - to save itself using the Opportunity Attack rules. It gives a cool, cinematic moment for the player and a chance to avoid all that falling damage. Don't let someone move further than they should be able to, get all their attacks off, AND do something else. The idea is to give someone a cool moment, not to resolve three rounds of actions in one turn.
Fourth Caveat: Don't Rule of Cool Something You Didn't Allow Someone Else Earlier
This happens by accident sometimes. The situation can change. When one player tries to do something, maybe it doesn't sound as epic but as the combat goes and things ratchet up it suddenly feels appropriate for a different character. Don't do it. This goes back to the First Caveat again, but if you let Tony do something you denied Sarah three rounds earlier, Sarah is likely not going to catch that the situation changed. She will however note that Tony was allowed to do something she was not. That's not cool.
Fifth Caveat: Be Enthusiastic
Be enthusiastic when these moments happen. My favorite way to respond is to flat out go "That sounds awesome! Do it!" Enthusiasm and excitement are contagious, and getting involved in your players' cool ideas will encourage them to come up with more.
Finally, Mind 'Power Creep'
Someone does something cool and you allow it. Something else happens later. Your players establish a pattern of occasionally getting these cool things off...but that makes things that were cool at the beginning not seem as cool now. Now you're thinking "I let Sarah throw her longsword twenty feet with an athletics check, so why couldn't Mandy throw her greatsword the same distance? it's not that much heavier..." and then that turns into Lorna throwing an anvil or something. Remember, the idea is to bend rules, not break them. So have a line where things get a little too out there. Barring super hero games, or extreme circumstances, no one should be wielding a city bridge as a melee weapon. It sounds awesome, but for most games - at least that I've seen - it's a little beyond the bounds of credibility.
Oh, and have fun with it.