They're taking the Theon/Ramsay story from Book 2 (which they didn't have time to adapt) and doing a variation of it in this season to given him and Ramsay something to do. Just as in book 2, Ramsay is pretending to be someone else to get close to Theon.
Seems odd to see Simon from Misfits playing a guy who turns into such a BASTARD (no pun lol).
Especially considering the stuff that plays out when he marries the fake Arya. But that's probably years down the line.