Guitarists often use diminished 7th chords as substitutes for dominant 7th chords on the guitar. For example, you can play the typical jazz progression Cmaj7-A7-Dm7-G7 as Cmaj7-Csdim7-Dm7-G7. In this case, the Csdim7 chord replaces A7.
This substitution works for a couple of reasons:
Csdim7 has many of the same notes as A7. Csdim7 has Cs, E, G, and Bf, and A7 has A, Cs, E, and G. Notice the three notes they have in common: Cs, E, and G. Basically, the Csdim7 chord is like an A7 chord, except that it’s missing the root note A.
Csdim7 contains the leading note of the chord of resolution; the Cs is the leading note of D.
The main thing you need to remember when substituting diminished 7th chords for dominant 7ths is this: The root of the diminished chord is the 3rd of the dominant 7th chord. Here are a few examples:
The 3rd of A7 is Cs, so you can substitute Csdim7 for A7.
The 3rd of G7 is B, so you can use Bdim7 in place of G7.
The 3rd of C7 is E, so you can use Edim7 in place of C7.