You can use the IDirect3DRMTexture::SetDecalTransparency method to produce transparent textures. Another method for achieving transparency is to use DirectDraw's support for color keys. Color keys are colors or ranges of colors that can be part of either the source or destination of a blit or overlay operation. You can specify that these colors should always be overwritten or never be overwritten.
For more information about DirectDraw's support for color keys, see Color Keying.