Is the red word used incorrectly?

[muon2]

It is correct in that sentence. Theater can mean the area in which something happens (Oxford English Dictionary). It is frequently used in that context in military affairs. The OED gives the example "a new theater of war has been opened up. Theater of war is particularly used when the areas of conflict are not close to each other. In WWII it is common to talk about the Pacific and European theaters.