Hi Chris,
I played around with a similar idea a years ago. I dive bugs with a float line so started with a mini float that I shaped from part of a small lobster buoy (1/2 of the egg sinker looking one). I put reflective DOT tape on the float and covered the whole thing with epoxy like a guide wrap on a fishing pole.
I tried putting that light you have shown into a recess on the float but it was a little too bulky and hung up in the kelp. Ended up finding on Amazon "Waterproof Submersible LED Tea Lights" and fitted the float to accept those. At under $1 each (depenging on qty) they are basically disposable.
If there is any light pointed at it the DOT tape lights right up and if not the light from LED is made more visible by the reflection off of DOT tape. See 3rd photo taken in dark with flash.
Alongside the line that goes through the float is a piece of weed whacker line/mono. The shrink tubing covers both and is shaped with the downward curve so the weight of the hardware at end of float line always keeps the light pointed up. It was not big enough to ballast the bottom side with lead. The shrink tubing part also helps to guide it through the kelp without snagging where the line exits the float.
I quit using the light (cant remamber exactly why) but never dive bugs without the reflective float. I do remember trynig to improve the reliability of not flooding the light by greasing the o-ring. I'll be giving them another try on my next time out.
Being on the end of the float line the light doesnt see the same pressure cycling it would if I had it on me so is likely less prone to flooding that way.
I always intended to remake it using surfboard foam and not long ago had some gifed to me but havent had the chance to remake the proto into a final. One day...haha.

Lil Bugger 1.png (1.24 MiB) Viewed 472 times

Lil Bugger 2.png (791.32 KiB) Viewed 472 times

Lil Bugger 3.png (1.08 MiB) Viewed 472 times