Should you treat it as an absolute # that you should never sell an option below or buy an option above theo value? Or just treat it like a rough estimate and give it some slack when making option trades?

Where are you getting your "theo" values? Is this value something you lookup? Is it something you compute?

I assume you mean the Theo value on the thinkorswim screen. This is the theoretical value. It should be between the bid and the ask. I use it all the time for orders. Take the theo value, give the market maker 0.03 - 0.05 and you will most likely get filled. The theo value is about as clos eto true value as you are going to get. And the cool thing with TOS is that it is dynamic and very current.

He might also mean the "theo" value some hucksters claim should be computed by substituting HV in place of current IV in options calculators to get the "theoretical" or "fair" price...shit like that...

The theoretical value of an option is merely the output of a mathematical formula, of which there are several. In order to use one of these formulae you have to input several stochastic variables, and therefore there is no such thing as an absolute theoretical value. It is just an estimate depending on which pricing model you use and what you estimate the inputs are for said variables. As to TOS, and I am a fan of them by the way, their theoretical value is useless. It is just the midpoint of the current bid/ask. I constantly see TOS traders put in spread trades for ridiculous prices based on midpoints rather than a correct theoretical value. Midpoints are affected by 1 lots on the bid or ask, but theoreticals are obviously not. An example may help: the SPX July 1455-1465 Put spread is marked (based on midpoints) at 1.05 while the 1460-1470 Put spread (which has to worth more) is marked at .85. You need to know that they are both worth about .85 to .90, based on current vols, in order to trade them.

This is why exactly why I asked the OP to define his source of "theo value." We still don't know what he's asking.

It's model-dependent. GIGO with respect to your vol-assumption and model implemented. An implied fairval is simply the mid of the realtime bid-offer mark.