Source games do not read PNG or GIF image transparency, It has to be done through Alpha Channels.
With your spray open, hold down control and click on the spray in the layer panel, I've highlighted the areas you need to click below, and what it should look like after you've clicked on it.
Next you want to click on the Channels
tab, by default this will be next to Layers. If you somehow closed it you can reopen it by going to Windows > Channels.
With the Channels tab open and your foreground image selected, we will need to click on the Create New Channel
button at the bottom. I've highlighted this selection below.
You will now notice that your image has gone entirely black. this is normal and just means you're doing everything correctly. When you apply alpha channels different colours mean different things.
- White - Entirely Visible
- Black - Invisible, these areas will not show
- Gray - Semi-Transparent
For this tutorial I will simply be using White. Using some grey where you have drops shadows is typically a good idea, but isn't entirely necessary.
Select the paint bucket tool and choose a pure white colour, the HEX number you will be using is #FFFFF.
Paint in the selected area. You will now end up with a white blob kind of like what I have below.
Make all of your channels visible again. This is exactly the same as hiding a layer, simply click on the eye left to the left. All of them need to be set to visible, including the one you just created.
The red area is now the transparent part. If you are unhappy with how it came out you can readjust the Alpha Channels by going back or loading a previous save.
Mine isn't perfect by any means.
All that is left to do now is Save the image. Navigate to File > Save As...
and save it as a Targa File (.TGA).
You will need to make sure you have the Enable Alpha Channels