I know I have read that there are a couple of different schools of thought on polyp extension - one being an indication of a healthy coral - the other being that a lot of extension is an indication that the coral is not getting enough food - ie light and flow - and is extending it's polyps in search of same (note a LOT of extension or overextended).
I would also bet money that the little yellow bugger is picking at it and causing it to be irritated and pulling in it's polyps. I believe that they can eventually kill the coral and it is not recommended to keep them together.
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