Two microphones (often first order cardioids) in the same point (coincident) and angled to create the stereo image 
XY stereo set-up is a coincidence stereo technique indicating, that 2 microphones are placed in the same point. The most commonly used XY set-up consists of two first-order cardioid microphones angled typically 90° to produce a stereo image. Theoretically, the two microphone capsules need to be at exactly the same point to avoid any phase problems due to the distance between the capsules. As this is not possible, the best approximation to placing two microphones at the same point is to put one microphone on top of the other with the diaphragms vertically aligned. In this way, sound sources in the horizontal plane will be picked up as if the two microphones are placed at the same point.
The stereo image is produced by the off-axis attenuation of the cardioid microphones. While A-B stereo is a difference-in-time-stereo, the XY stereo is a difference-in-level-stereo. But as the off-axis attenuation of a first-order cardioid microphone is only 6 dB in 90°, the channel separation is limited, and wide stereo images are not possible with this recording method. Therefore, XY stereo is often used where high mono-compatibility is needed - for example, in broadcasting situations where many listeners still receive the audio on mono equipment.
Opening angles of 120° to 135° or even up to 180° between the capsules are also seen, which will change the recording angle and stereo spread. Bidirectional (figure-of-eight) microphones and more directional cardioidtypes like hypercardioids can also be used for XY Stereo.
Since the sound-sources are mainly picked up off-axis when using the XY stereo setup, high demands are placed on the off-axis response of the microphones used. And as described earlier, the use of directional microphones at large distances will reduce the amount of low frequency information in the recording, due to the proximity effect exhibited by the directional microphones. The XY configuration is therefore often a close miking application choice.