The vibrato is done by miniscule frequent movements of your arm either in the direction towards and away from the vertical aerial, or side to side. You will find out which way works better for your arm and your type of the theremin. By the time you may also use both techniques depending on music you play. Under no circumstances should this be a movement of the hand, controlled by the wrist.
When playing a melody, we should not use vibrato on each note. Perhaps only on longer notes and always supported by a change in dynamics.