This activity is meant to practice vocabulary and spelling. I prefer a simple version of the game, but it can easily be made more difficult.
I have noticed that students at every level have trouble remembering the names of letters in English despite the fact that (or because?) they learn the alphabet so early. As a little refresher, I find it helpful to practice the alphabet immediately prior to this activity, e.g. by saying it together as a class or having each student say one letter.
To set up the game, the teacher draws a 5 x 5 grid on the board or on a piece of paper. (If the teacher uses the the board, the students can follow along more easily.) Each student then draws their own grid on a piece of paper.
To begin the game, the teacher says one letter of the alphabet and writes it in one square (any square). Students write the same letter in any one square of their grids. Then, students take turns each saying one letter, which each student adds to their grid. The goal is to write words of two to five letters. To keep things simple, I prefer to count only words going left to right or top to bottom. Generally, I allow letters to be repeated any number of times, but limits can be set by the teacher to add a challenge.
Each word is worth a certain amount of points. 5-letter words are worth 10 points. Words with 4, 3 or 2 letters are worth the number of letters in that word. Points are tallied at the end to determine the winner. Don’t forget to explain the point system before beginning the game.
The activity can be done as a class or in smaller groups. It is up to the teacher to decide what kinds of words should count. I prefer not to include acronyms like CEO, but having such words count can be useful. Limits or bonuses can also be set for parts of speech or other word categories, e.g. only verbs will be counted or color words count double.