Look around for possible bee's nest. The stallion at our farm found a nest of yellow jackets. He was stung a few times near his dock and anus and it set off a local reaction. His sheath and testicles swelled enormously. The vet came and had to give him a steroid injection for the inflammation, and we had to put a topical salve on to help relieve the itch. She warned us that it was very important to take your hint from the animal: is he peeing normal? Is he in pain? Can he stand or lay down comfortable? Basically, as long as he's doing okay, you can watch and see. But if there is pain, discomfort or change in bodily functions; that's a good time to seek a vet. On a side note, our poor boy spent a week swelled up. His poor testicles were the size of cantaloupe.
Is your gelding dropping his penis more than normal with this swelling? Or, is he having difficulty urinating? Does the penis itself look normaI? I would say that the most common cause of a swollen sheath is uncleanliness. Have you cleaned his sheath recently? Not only must the penis itself be cleaned, but also up inside the sheath area as well as removal of the "bean" in the urethral opening. Let me know if this could be the cause or if you need more explanation about sheath cleaning. Another possibility could be that there is a cut or abrasion or some sort of bite (insect, spider...) in the area. Have a close look. There could also be a foreign object inside the sheath, perhaps some bedding, or a piece of straw/hay. This could probably be located and removed with the cleaning. Also, a sedentary lifestyle could prohibit circulation in that area which could be improved with regular turnout. However, if he is already on regular turnout, it is most likely one of the other options. There could be other reasons, but this is a start. If a cleaning does not resolve the situation, it worsens, or you see any odd behavior or complications, please consult your Veterinarian.