Hi D.!
What I loved about your post, is the way you tried so hard to help your Grandson. Just because YOU know that eyeballs don't "float" in mid air, doesn't mean he believes that :o) You simply understand that his ideas are very real. That's what he needs most right now, is to be "believed".
There is always one kid (usually with an older sibling) that can "ruin" things for our kids.......like what has happened to your grandson. He was probably a great sleeper and all, now he won't go anywhere in his own home!
We've been through something similar with our son. The things that worked the most was the "weapon" he was allowed to sleep with.....a play sword, gun or whatever he thought he needed. After a few nights of that, I began to realize that he was SERIOUS and VERY afraid in his own room! So, I layed in his bed with him with the weapon in MY hand. I told him not to worry, but I would hold the weapon for him while he was sleeping. He finally got the sleep he needed.
This took longer to "recover" from than I had hoped. I mean, once we finally got "over" the fear of something scary outside the window, then it was just the "need" to help him sleep through the night in his bed. Which I was expecting because I was creating an extra "security" in his room by sleeping in there. But, I felt it was up to me to create that security...I am the mom :o)
Anyway, to get us back to "normal", I had to do the same things that a mom would do if she were trying to get a child back into their own bed after sleeping with in mommy's bed for so long. I know these routines because my older boy was like that :o) It probably took 4 months, maybe longer (he's 11 now and I can't remember).
Maybe to help your grandson, a "weapon" would give him security. But, I would recommend that someone lay in his bed to see what he see's at night. There might actually be a shadow that scares him. He may need a different night light.
They have these electric "glow sticks" for under the bed, so a child feels safer at night.
I hope things get better for your grandson. I believe this is more normal than not.
Good luck!
:o) N.