This exercise is from the Theory Section on the CAGED system.
Here we solo over the 4 simple chords from this Backing ActionTab:
C major - G major - D minor - A minor (repeat)
We are soloing in the key of C major, and switching between the various CAGED positions for that scale. If you need to refresh yourself on the C major CAGED positions you can find them here.
See how we switch between CAGED positions in the following places:
C position - A position - C position (octave) - D position - G position - E position - D position
It is all just the C major scale (C D E F G A B C), but notice how playing between all these CAGED positions really gives you more musical options than just playing in a single position.
We're not suggesting you learn this solo off by heart or anything. Just see it as an example of flowing between the CAGED positions to stay in key. This is a very useful skill for any aspiring lead guitarist. Most songs will be in a Key. If you know the CAGED positions you can quickly find the Key and solo happily away. Just make sure you know the CAGED scale positions!
Once you have them down, go back to the Backing ActionTab, loop it and work at creating your own melodies. Start slowly, and even just by switching between scales as the backing chords change. Step it up once you have some confidence, and start working more on your melody. Use the Jamzone Scale Game articles for ideas on creating melodies from scales (e.g. this or this or others).