Understanding Alterations is not too hard. Just picture a D7 chord in a song in G. We call the D7 the Dominant chord. Now while the chord is played by the rhythm players, we can improvise the arpeggio as a melody on top: d - f# - a - c. We can even add another arpeggio note called the '9' to make it d - f# - a - c - e. It is still the same sound basically. But that changes, when we change the e to an e-flat! This change is an Alteration: a very small change of one note which gives the chord a slightly different sound. To understand Substitutions, look at the D7 chord again. The notes are d - f# - a - c and with the '9' at the top, they are d - f# - a - c - e. And a - c - e is the same as A Minor, right? So you could say that A minor lives in the D7 chord. The next step is, when my guitarist plays a D7 chord, why don't I pretend it is A minor and play an A minor lick in my solo? And now, you are thinking in A minor, while your guitarist is playing a D7. Two harmonies happening at the same time because you have Substituted D7 for Am!
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Tonic Substitutions
When you have a Tonic chord, like G Major, look at its arpeggio: g - b - d - f# (the f# is the MAJOR seventh, belonging to the G major scale). The last three notes b - d - f# suggest a different chord: B Minor! And if you look closely, G Major and B Minor share 3 (THREE) notes. That is a lot. You could say they are the same chord, even. So if you are playing Lady Be Good and your guitarist hits the first G chord, you could decide to play a B Minor lick instead. It just sounds a bit different and what you have done is Substitute the Tonic for another chord. Cool, eh?
Altering a chord is changing one of its arpeggio notes, or adding a new one. Altered chords have a # or b sign in their name. To turn D7 (D-seven) into D7b9 ("D-seven-flat-nine") the nine has to be added (the note 'e') and then lowered to 'e flat'. To turn a D7 into D7#5 (D-seven-sharp-five) the fifth has to be raised to an 'a sharp'. But with Altered chords, the original chord, the original root, is still standing! That is different with Substitutions, which we look at later ... Here are the Licks that will allow you to use an Altered sound. Practice the EXACT lick, and transpose it to the key that you need it in.
Substituting a chord is playing melodic lines on top that suggest a different chord! So now we think of a different Root note altogether. The most famous one, Tritone Substitution, works like this: a D7 chord is replace in our mind by its Tritone, the Ab7 - and we play a Lick that fits the 'new' chord. So we forget about the D7 chord altogether, not like Alterations where we always stay in touch with the Root note. To start with, some easier Subs to get warmed up :)
After all this, here are some exercises that might be too fast for your brain, but maybe not for your fingers! While you train this (learn the transcription slowly and precisely with a slow metronome, before trying out with my video or the song's backing track), your ears will learn something too ...