"After Daario Naharis comes into play, choose and discard 1 Knight or Traitor character from play."

Is it a must to discard a Knight/Traitor or is it a choice?

Can you discard Knight or Traitors from an opponent? Or is it only cards under your control it means when it says "Choose and Discard"?

Can i put up Daario during Setup without discarding anything?

Thanks for explanation

Because it's not a triggered effect (no bold "Response" text, like Aerys Oakheart), you are forced to discard a Knight/Traitor.

You can, however, discard an opponent's - that's what it's usually used for! The only time effects are restricted to characters you control it will either explicitly state as much (choose and discard a knight/traitor you control), OR it will be listed as a cost (Discard a knight you control TO stand a character). As costs can only be paid with cards you control, anything before a "to" can only be done with/to cards you control.

Finally, you can definitely place Daario in setup, and since he never 'comes into play', his ability never triggers.

Daario is a traitor, so if there are no other traitors or knights in play, you would have to discard Daario

Thanks Istaril and Hast!