> However I am observing an issue with the vertical
> alignment of the images displaying the equations. More specifically, the
> "base lines" of the characters in the overlaid images does not seem to
> match the base line of the surrounding text in the final output as
> displayed on the screen.

I'm not sure if you can do anything about this. Repeating your example here:

,----
| _ $x$ $y$ _ some text
| _ $xyT$ _ some text
`----

`org-latex-preview' will use that value of the variable 
`org-preview-latex-default-process' to generate the preview. The value of that 
variable should be one of the options listed in the variable 
`org-preview-latex-process-alist'. The default is `dvipng' which will run LaTeX 
and then dvipng to generate a png, then display that (as an overlay I think) 
where the TeX was.

In the first example, there will be two png's: one for x, then one for y, then 
followed by the text. So it's just two image files. There's no way for emacs to 
know where the baselines were supposed to be and so can't vertically align the 
images so their contents have matching baselines.

In the second example, LaTeX generates output with the correct baselines 
*within the png*. Then `org-latex-preview' overlays a single png which is 
already correctly alignment within the image.

Instead of png's, you can use svg's. See `org-preview-latex-default-process' 
for options. But I'm not sure that would be any help. Maybe someone else knows 
some clever tricks.

Personally, I just accept that sometimes LaTeX previews look a little weird. I 
did tweak the png conversion a little to increase the size a bit and add some 
padding to make it more readable, but that tends to make things look even worse 
sometimes!

-- *Paul* 

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