Daniels had one year left on a three-year deal worth about $15 million. He would have counted for $6.25 million against the salary cap for the 2014 season.
By releasing Daniels, the Texans save $4.5 million against the cap. The Texans also released cornerback Brice McCain on Tuesday.
Graham served as Daniels' backup last season but started in his place after Daniels suffered a nondisplaced fibula fracture in Week 5.
The 31-year-old Daniels, who was drafted by the Texans in 2006, was one of quarterback Matt Schaub's favorite targets. He has 385 career receptions, 4,617 yards and 29 touchdowns -- which all rank second in franchise history.
Daniels' release was earlier reported by the Houston Chronicle.