I'm not sure what you mean by optimized but i'd do:

>>> import re
>>> mytext = "this is my/string"
>>> re.sub('/.*','/text',mytext)
'this is my/text'

I am not sure what you want to achive, but it seems you just want to replace a '1' for an 'I' just once, so try this:

string = "11234"
string.replace('1', 'I', 1)

str.replace takes 3 parameters old, new, and count (which is optional). count indicates the number of times you want to replace the old substring with the new substring.

You could use a negative look behind and specify only a single replace to occur:

>>> import re
>>> s = 'paper'
>>> re.sub('(?<!^)p', 'k', s, 1)
'paker'

But then you could do that without a regex as such:

s[0] + s[1:].replace('p', 'k', 1)

Several problems:

1. for line in string_file: iterates over the characters, not the lines. You can use for line in string_file.splitlines(): to iterate over lines.
2. lines.replace() doesn't modify the line in place, it returns a new line. You need to assign that to something to produce your result.
3. The name of the function parameter should be string_file, not str.
4. The function needs to return the new string, so you can assign that to a variable.

def substring_replace(string_file):
    result = []
    for line in string_file.splitlines():
        if line.startswith('-- '):
            line = line.replace('from', 'fromm')
        result.append(line)
    return '\n'.join(result)

string_file = substring_replace(string_file)

replace.py

import re

input = [
    "Independence Day (Observed)",
    "Christmas Eve, Christmas Day (Observed)",
    "New Year's Eve, New Year's Day (Observed)",
    "Martin Luther King, Jr. Day"
]

for holiday in input:
    print re.sub('^(.*?, )?(.*?)( \(Observed\))$', '\\2', holiday)

Output

> python replace.py 
Independence Day
Christmas Day
New Year's Day
Martin Luther King, Jr. Day

Explanation

• ^: Match at start of string.
• (.*?, )?: Match anything followed by a command and a space. Make it a lazy match, so it doesn't consume the portion of the string we want to keep. The last ? makes the whole thing optional, because some of the sample input doesn't have a comma at all.
• (.*?): Grab the part we want for later use in a capturing group. This part is also a lazy match because...
• ( \(Observed\)): Some strings might have " (Observed)" on the end, so we declare that in a separate group here. The lazy match in the prior piece won't consume this.
• $: Match at end of string.