How to make a custom ISO image

The easiest way is to use script alpine-make-vm-image.

Live Disk Setup with customized APKOVL configurations

Once you have booted and customized the system that was booted from an ISO, you can now configure the ISO to load the customizations as follows:

Generate an APKOVL file with lbu, lbu ci
The Alpine ISO looks for an APKOVL Volume in mountpoints below /media/, or can be pointed to a web server.
If you put the APKOVL file on a webserver, you need to add a customized url with the APKOVL boot parameter.

Notes:

Any packages you add to /etc/apk/world of your lbu will automatically be installed onto the live system image.
If you don't have a web server you can run busybox's httpd temporarily - busybox httpd -p 127.0.0.1:80
In general, lbu will only handle files in /etc, to customize this further, you need to add additional files.
If you want to make a customized installer, you need to create .default_boot_services which will cause mkinitfs to create the defaults for the live image.

Qemu is useful for a quick test of your created ISO image.