There's a wonderful video under the Free Video tab at the top of the page, knitting with 2 colors
. Notice the way the knitter drops the white yarn and picks up the blue yarn so that the yarns are crossed over each other and don't leave a hole where you switch colors. You also get to see a view of the back of the work and the kind of loops you should see on the wrong side. You don't have to tie anything off.
As far as pulling goes, it's just a matter of knitting loosely so that the yarn carried over the back isn't tightening up or puckering the entire work. I got over doing this by exaggeratedly leaving a loop of the carried yarn in the back. It turned out to be just right! Experiment with a looser tension on that carried yarn.
I love the idea of pants with butterflies!