The knife is still held carefully in his hands, not actively threatening, but still easy enough that he could stab quickly if need be. He can chat friendly and still be wary after all.

And Theo could say the same about this guy's clothing.

"Actually, I was possibly going after you with the knife." He hefts up a burlap sack. "This was for the pixies."

At times Theo is unabashedly paranoid and not afraid to admit it.