How do I make a players character torso turn transparent with the OnPlayerEntered function?

Line 2 is your error. The Parent of a Player object is the Workspace, so what you're really doing is finding a nil Humanoid in the Workspace, which causes FindFirstChild() to return nil. The Humanoid is always a child of the player's Character:

local humanoid = player.Character:FindFirstChild("Humanoid")

Additionally, if your game allows R15 rigs (R15 avatars), Torso will not work because there is an UpperTorso and a LowerTorso.

Assuming your game allows R15:

local function OnPlayerEntered(player)
    local humanoid = player.Character:FindFirstChild("Humanoid")
    if humanoid then
        player.Character.UpperTorso.Transparency = 0.5
        player.Character.LowerTorso.Transparency = 0.5
    end
end
game.Players.PlayerAdded:Connect(OnPlayerEntered)

Assuming your game allows R6 but not R15:

local function OnPlayerEntered(player)
    local humanoid = player.Character:FindFirstChild("Humanoid")
    if humanoid then
        player.Character.Torso.Transparency = 0.5
    end
end
game.Players.PlayerAdded:Connect(OnPlayerEntered)