The easiest way to do a single repeat small design when in the round is with duplicate stitch. Basically, you finish the shorts and go back over some of the stitches with a tapestry needle and colored yarn -- sort of like embroidery.
If you want a really big bug, there are ways of doing intarsia "in the round" which actually involve back and forth knitting but using a yo at the start of the round and a k2tog at the end which picks up the yo to create the seam.
If you want itty bitty repeating bugs -- say ladybugs crawling in a circle around the shorts -- you might be able to work out a stranded knitting pattern where you don't carry a color more than 5 stitches.
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