The Chicago Manual of Style's only real concern is that the character names be obviously different from the dialogue, which can be done with boldface or italics (preferred). Character's names may be abbreviated, and their speeches should be indented left.

Small caps for character names. Italics are for stage directions.

Take a look at the Yale drama series for an interesting design. The speakers names are on a line by themselves, and the only place where there is space above. All stage directions are set in italic (conventional) and begin a new line. If you're reading a play as an actor -- or working sound or lights -- this is very helpful. All the spoken words are together, all the instructions are in italic and on a line(s) by themselves. As below, except I can't set small caps here.

FRED:
Blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah
smiles
blah blah blah blah blah blah blah blah blah blah.
exits stage right, as ESMERELDA and her entourage enter stage left, trailing daffodils, and chanting an odd mixture of an Irish and Hawai'ian tune.

ERNIE:
Blah, blah, blah.

This style (design) is a little harder to read at first if you are sitting in an armchair, but if you've ever worked in the theater, it is a delight.

One small amendment to Charles; very short directions are some times set in italics within the dialogue, enclosed in parenthesis; e.g.:

JOHN:
Hello! (calling offstage) Hello?

Dan, here is a quick screenshot from a book I typeset some months ago, featuring three plays. As Charles pointed out, small caps are usually used for character names, and I've also used italics are for stage directions. Another crucial element is the negative paragraph indent after the first line, which helps the reader keeping track of who's talking. Also, after the character name I put a double space before teh dialogue starts (sometimes, in other books I've seen, it is more spaced). Hope this is helpful.

Just a note -- running in small directions, such as "smiles," is conventional, whereas breaking even one word to a new line, a la the Yale style, is not. In fact, if a "direction" occurs in the middle of a speech, the whole thing is often run in.

Many authors, and editors, prefer the run in style, esp. when the dialogue is short. My response is they're more comfortable in the armchair than in the working part of a theater.

The flush & hang too is more conventional -- you're using extra space along the left margin to signal a new speaker, rather than interlinear space. Either works to help you find your place. The more stage directions there are, the better flush & hang. Same if each speech is short.

As a general observation, the younger the playwright, the better off you are to stay "conventional." Editors can get rule-bound at any age . . .

"In fact, if a "direction" occurs in the middle of a speech, the whole thing is often run in."

Charles: Can you explain "the whole thing is run in"? I guess I don't know what "run in" means.

Thanks.

John,

as with a quote -- run in means only a word space separates the item on either side, and it is signaled as different by some device -- quote marks for a quotation, parens and italics for a stage direction, etc.

FRED:
Blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah blah (smiles) blah blah blah blah blah blah blah blah blah blah (ESMERELDA and her entourage enter stage left, trailing daffodils) blah blah blah blah blah blah.

Thanks Charles.