What does chao mean in Spanish?
You spelled it right. It is "bye" (and even "hello") in Italian (spelled as "ciao" in that language), but it has become so fashionable, that has been incorporated in Spanish, although not everybody uses it.
The word ciao (Italian pronunciation: [ˈtʃaːo], English: /ˈtʃaʊ/) is an informal Italian verbal salutation or greeting, meaning either "hello", "goodbye", "bye" or "hi". Originally from the Venetian language, it was adopted into the Italian language and eventually entered the vocabulary of English and of many other languages around the world. The word is mostly used as "goodbye" or "bye" in English, but in modern Italian and in other languages it may mean "hello" or "goodbye".
In Spanish, Chao (or chau) means goodbye.