This depends on what you want to do with the string that you create. It looks like a set of command line options, so I'm going to assume that you want to use it as such together with some utility called util.
Here's a solution for /bin/sh:
#!/bin/sh
list=$1
set --
while IFS= read -r line; do
set -- "$@" -o "$line:1"
done <$list
util "$@"
This reads from the file given on the command line of the script and for each line read from that file, it sets the positional parameters to include -o and LINE:1 where LINE is the line read from the file.
After reading all the lines, it calls util with the constructed list of command line arguments. By using "$@" (with the double quotes) we ensure that each individual item in the constructed list of arguments is individually quoted.
With bash and using a separate array to hold the command line arguments that we create:
#!/bin/bash
list=$1
while IFS= read -r line; do
args+=( -o "$line:1" )
done <$list
util "${args[@]}"
In both the examples above, the quoting is important. Likewise is the fact that we create an array of separate items (each -o and each LINE:1 are items in the list). Another way to do it would have been to create a single string -o LINE1:1 -o LINE2:1 etc., but this would have been interpreted as one single argument if used as util "$string" and would have undergone word splitting and filename globbing if used as util $string (this would have not worked if any line in the input file contained spaces or filename globbing characters).
Both script above would be used as
$ ./script.sh file
where script.sh is the executable script file and file is the input file name to read from.
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